Exact Measures of Income in a Hyperbolic Economy

Reference:

Pezzey, J. C. V., 2002. Exact Measures of Income in a Hyperbolic Economy. Working Paper. Australian National University.

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Abstract

Exact optimal paths are calculated for a closed economy with human-made capital, non-renewable resource depletion and exogenous technical progress in production, hyperbolic utility discounting, and (possibly) hyperbolic technical progress. On its optimal path, generally, welfare-equivalent income > wealth-equivalent income > Sefton-Weale income > NNP, with possibly dramatic differences among these measures; and sustainable income can be greater, equal or less than NNP. This supports the view that there can be no best, exact definition of income. For low enough discounting, growth is optimal even when technical progress is zero. A particular discount rate makes all income measures and consumption constant and (except NNP) equal; and zero technical progress then gives the Solow (1974) maximin as a special case. General problems with calculating sustainable income when there is technical progress are discussed, and the optimal path is time-consistent if the discount rate can depend on the economy's stocks and absolute time.

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