DURABLE CONSUMPTION AS A STATUS GOOD: A STUDY OF NEOCLASSICAL CASES



The consumer-producer’s problem is, thus, formalized as follows:

max


Γ {u


c + ‘,s Q ɪ a ) + V (ŋ) e βt dt,


(2.8a)


subject to:

a = c δa,

____, _

к = F(к, I) c,

(2.8b)


(2.8c)


and the initial stocks of durable consumption and physical capital, a(0) = aŋ > 0 and
к (0) = ко > 0, where β is the exogenous rate of time preference. To solve the consumer-
producer’s problem, we form the current value Hamiltonian, which is given by:
where
φ and μ are the costate variables corresponding, respectively, to the constraints
(2.8b) and (2.8c). Maximizing equation (2.9), we calculate the following
Hrst order opti-
mality conditions:

c + a, s


+ V(Z) + φ (c δa) + μ [F(к, Z) c] ,


(2.9)


и и           , .1 U4 [c + a, s (г)] s' (г)            ,                           „ .

uc [c + a,s (г)] +                        = μ - φ,                (2.l0a)

e + a

V'(Z) = μFι (k,Z),                               (2.10b)

φ = (β + δ) φ Uc [c + a,s (г)] u [c +‘,'f ,jl s'(г),            (2.10c)

e + a

μ = μ Fk(k,Z)] .                             (2.10d)

The optimality conditions (2.10a)-(2.10d) have a straightforward interpretation. Equation



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