Skip to main content
×
×
Home

ENDOGENOUS TIME PREFERENCE AND PUBLIC POLICY: GROWTH AND FISCAL IMPLICATIONS

  • Evangelos V. Dioikitopoulos (a1) and Sarantis Kalyvitis (a2)
Abstract

This paper studies the growth and fiscal policy implications of the assumption that public policy generates an externality in the individual rate of time preference through the aggregate public capital stock. We examine the competitive equilibrium properties and we solve for endogenous growth–maximizing fiscal policy. We investigate the behavior of the government size and the growth rate to the sensitivity of time preference to public capital and the magnitude of public capital externality on production. We find that the Barro taxation rule [Barro, Robert J., Journal of Political Economy 98 (1990), 103–125], which states that the elasticity of public capital in the production function should equal the government size, is suboptimal. We show that the government does not necessarily have to increase income taxation following a rise in public capital intensity because of the externality of public capital on time preference and, in turn, on growth and the tax base of the economy.

Copyright
Corresponding author
Address correspondence to: Evangelos V. Dioikitopoulos, Department of Economics, University of Cyprus, P.O. Box 20537, CY-1678 Nicosia, Cyprus; e-mail: evangelos.dioikitopoulos@aueb.gr.
References
Hide All
Agenor, Pierre-Richard (2006) A Theory of Infrastructure-Led Development. Discussion Paper EDP-0640, University of Manchester.
Agenor, Pierre-Richard (2008) Health and infrastructure in a model of endogenous growth. Journal of Macroeconomics 30, 14071422.
Aisa, Rosa and Pueyo, Fernando (2006) Government health spending and growth in a model of endogenous longevity. Economics Letters 90, 249253.
Asenso-Boadi, Francis, Peters, Tim J., and Coast, Joanna (2008) Exploring differences in empirical time preference rates for health: An application of meta-regression. Health Economics 17, 235248.
Barro, Robert J. (1990) Government spending in a simple model of endogenous growth. Journal of Political Economy 98, 103125.
Barro, Robert J. (1999) Ramsey meets Laibson in the neoclassical growth model. Quarterly Journal of Economics 114, 11251152.
Bauer, Michal and Chytilova, Julie (2010). The impact of education on subjective discount rate in Ugandan villages. Economic Development and Cultural Change 58, 643669.
Becker, Gary S. and Mulligan, Casey B. (1997) The endogenous determination of time preference. Quarterly Journal of Economics 112, 729758.
Bhattacharya, Joydeep and Qiao, Xue (2007) Public and private expenditures on health in a growth model. Journal of Economic Dynamics and Control 31, 25192535.
Blankenau, William F. and Simpson, Nicole B. (2004) Public education expenditures and growth. Journal of Development Economics 73, 583605.
Chakraborty, Shankha (2004) Endogenous lifetime and economic growth. Journal of Economic Theory 116, 119136.
Chao, Li-Wei, Szrek, Helena, Pereira, Nuno Sousa, and Pauly, Mark V. (2009) Time preference and its relationship with age, health, and survival probability. Judgment and Decision Making 4, 119.
Chen, Been-Lon (2007) Multiple bgps in a growth model with habit persistence. Journal of Money, Credit and Banking 39, 2548.
Devarajan, Shantayanan, Swaroop, Vinaya, and Zou, Heng-fu (1996) The composition of public expenditure and economic growth. Journal of Monetary Economics 37, 313344.
Dolmas, Jim (1996) Balanced-growth-consistent recursive utility. Journal of Economic Dynamics and Control 20, 657680.
Drugeon, Jean-Pierre (1996) Impatience and long-run growth. Journal of Economic Dynamics and Control 20, 281313.
Drugeon, Jean-Pierre (2000) On the roles of impatience in homothetic growth paths. Economic Theory 15, 139161.
Economides, George, Park, Hyun, and Philippopoulos, Apostolis (2007) Optimal protection of property rights in a general equilibrium model of growth. Scandinavian Journal of Economics 109, 153175.
Epstein, Larry G. and Hynes, J. Allan (1983) The rate of time preference and dynamic economic analysis. Journal of Political Economy 91, 611635.
Fuchs, Victor R. (1982) Time preference and health: An exploratory study. In Fuchs, Victor R. (ed.), Economic Aspects of Health, pp. 93120. Chicago: University of Chicago Press.
Futagami, Koichi, Morita, Yuichi, and Shibata, Akihisa (1993) Dynamic analysis of an endogenous growth model with public capital. Scandinavian Journal of Economics 95, 607625.
Glomm, Gerhard and Ravikumar, B. (1997) Productive government expenditures and long-run growth. Journal of Economic Dynamics and Control 21, 183204.
Glomm, Gerhard and Ravikumar, B. (1998) Flat-rate taxes, government spending on education, and growth. Review of Economic Dynamics 1, 306325.
Greiner, Alfred and Hanusch, Horst (1998) Growth and welfare effects of fiscal policy in an endogenous growth model with public investment. International Tax and Public Finance 5, 249261.
Harrison, Glenn W., Lau, Morten I., and Williams, Melonie B. (2002) Estimating individual discount rates in Denmark: A field experiment. American Economic Review 92, 16061617.
Hashimoto, Ken-ichi and Tabata, Ken (2005) Health infrastructure, demographic transition and growth. Review of Development Economics 9, 549562.
Horioka, Charles Y. (1990) Why is Japan's households saving so high? A literature survey. Journal of the Japanese and International Economies 4, 4992.
Khwaja, Ahmed, Silverman, Dan, and Sloan, Frank (2007) Time preference, time discounting, and smoking decisions. Journal of Health Economics 26, 927949.
Kirby, Kris N., Godoy, Ricardo, Reyes-Garcia, Victoria, Byron, Elizabeth, Apaza, Lilian, Leonard, William, Perez, Eddy, Vadez, Vincent, and Wilkie, David (2002) Correlates of delay-discount rates: Evidence from Tsimane' Amerindians of the Bolivian rain forest. Journal of Economic Psychology 23, 291316.
Laibson, David (1997) Golden eggs and hyperbolic discounting. Quarterly Journal of Economics 112, 443477.
Lau, Sau-Him Paul (1995) Welfare-maximizing vs. growth-maximizing shares of government investment and consumption. Economics Letters 47, 351359.
Lawrance, Emily C. (1991) Poverty and the rate of time preference: Evidence from panel data. Journal of Political Economy 99, 5477.
Lazaro, Angelina, Barber, Ramon, and Rubio, Encarnacion (2001) Private and social time preferences for health and money: An empirical investigation. Health Economics 10, 351356.
Meng, Qinglai (2006) Impatience and equilibrium indeterminacy. Journal of Economic Dynamics and Control 30, 26712692.
Misch, Florian, Gemmell, Norman, and Kneller, Richard (2008) Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth. CREDIT Research Paper 08/09, University of Nottingham.
Mourmouras, Iannis A. and Lee, Jong Eun (1999) Government spending on infrastructure in an endogenous growth model with finite horizons. Journal of Economics and Business 51, 395407.
Obstfeld, Maurice (1990) Intertemporal dependence, impatience and dynamics. Journal of Monetary Economics 26, 4575.
Olsen, Jan Abel (1993) Time preferences for health gains: An empirical investigation. Health Economics 2, 257265.
Palivos, Theodor, Wang, Ping, and Zhang, Jianbo (1997) On the existence of balanced growth equilibrium. International Economic Review 38, 205224.
Sheldon, Garon (1997) Molding Japanese Minds: The State in Everyday Life. Princeton, NJ: Princeton University Press.
Sheldon, Garon (1998) Fashioning a culture of diligence and thrift: Savings and frugality campaigns in Japan, 1900–1931. In Minichiello, Sharon (ed.), Japan's Competing Modernities: Issues in Culture and Democracy, 1900–1930, pp. 312334. Honolulu: University of Hawaii Press.
Shin, Shouyong and Epstein, Larry G. (1993) Habits and time preference. International Economic Review 34, 6184.
Shoda, Yuichi, Mischel, Walter, and Peake, Philip K. (1990) Predicting adolescent cognitive and self-regulatory competencies from preschool delay of gratification: Identifying diagnostic conditions. Developmental Psychology 26, 978986.
Stern, Michael L. (2006) Endogenous time preference and optimal growth. Economic Theory 29, 4970.
Strauss, John and Thomas, Duncan (1998) Health, nutrition, and economic development. Journal of Economic Literature 36, 766817.
Strotz, Robert H. (1956) Myopia and inconsistency in dynamic utility maximization. Review of Economic Studies 23, 165180.
Tanaka, Jumpei (2002) A note on government spending on infrastructure in an endogenous growth model with finite horizon. Economics Letters 54, 651653.
Turnovsky, Stephen J. (2000) Methods of Macroeconomic Dynamics, 2nd ed.Cambridge, MA: MIT Press.
Uzawa, Hirofumi (1968) Time preference, the consumption function, and optimal asset holdings. In Wolfe, John N. (ed.), Value, Capital and Growth: Papers in Honour of Sir John Hicks, pp. 485504. Edinburgh: Edinburgh University Press.
Van der Pol, Marjon M. and Cairns, John A. (2000) Zero and negative time preference for health. Health Economics 9, 171175.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 46 *
Loading metrics...

Abstract views

Total abstract views: 284 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 17th July 2018. This data will be updated every 24 hours.