DP3949 Recursive Preferences and Balanced Growth

Author(s): Roger E A Farmer, Amartya Lahiri
Publication Date: June 2003
Keyword(s): balanced growth, endogenous income distribution, recursive utility
JEL(s): D11, F40
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3949

We study a class of utility functions that are defined recursively by an aggregator function. In single-agent economies it is known that a sufficient condition for the existence of a balanced growth path is that utility should be homogenous. In the context of a multi-agent economy we show that this restriction implies that either a balanced growth equilibrium fails to exist or all agents have the same constant discount factor. We suggest a generalization of recursive preferences wherein the intertemporal utility function is time dependent. Within this class we establish that there may exist a balanced growth equilibrium even if agents are different. We give an example of our approach in the international context in which time dependence occurs because countries care about their relative position in the world income distribution.