Optimal Consumption With Intertemporal Substitution I: The Case of Certainty (Classic Reprint) - Softcover

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Excerpt from Optimal Consumption With Intertemporal Substitution I: The Case of Certainty

These non-time-additive utility functions offer intuitively appealing notions of interactions between past and current consumption. They are also mathematically tractable. Optimal con sumption policies can be characterized using dynamic programming. For particular functional forms of the felicity function, one can even have closed form expressions for these policies. Unfortunately, these utility functions fail to exhibit one key economic property that underlies much of our intuition about the behavior of asset prices over time in the absence of arbitrage possibilities.

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