Chapter 3 The Neoclassical Growth Model - MIT …

Chapter 3. The Neoclassical Growth Model 75. Economic Growth : lecture notes In the Solow Model , agents in the economy (or the dictator) follow a simplistic linear rule for con . sumption and investment. In the Ramsey Model , agents (or the dictator) choose consumption and investment optimally so as to maximize their individual utility (or social welfare). The Social Planner In this section, we start the analysis of the Neoclassical Growth Model by considering the optimal plan of a benevolent social planner, who chooses the static and intertemporal allocation of resources in the economy so as to maximize social welfare. We will later show that the allocations that prevail in a decentralized competitive market environment coincide with the allocations dictated by the social planner. Together with consumption and saving, we also endogenize labor supply. 76. Angeletos Preferences Preferences are de ned over streams of consumption and leisure, x = {xt }.

Economic Growth: Lecture Notes • The envelope condition for the Pareto problem is ∂(max U0) = ∂L0 = λ0 = Uc(c0,z0). ∂k0 ∂k0 More generally, λt = Uc(ct,lt) represents the marginal utility of capital in period t and will equal the slope of the value function at k = kt in the dynamic-programming representation of the problem. 88

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