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Conditions for Sustainable Optimal Economic Development
Author(s) -
Farzin Y. Hossein
Publication year - 2006
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2006.00338.x
Subject(s) - economics , consumption (sociology) , microeconomics , welfare , present value , investment (military) , sustainability , hyperbolic discounting , natural capital , bellman equation , capital (architecture) , value (mathematics) , econometrics , discounting , intergenerational equity , mathematical economics , mathematics , law , history , archaeology , sociology , political science , social science , ecosystem , ecosystem services , ecology , biology , market economy , statistics , finance , politics
This paper shows that, for dynamic optimizing economies with different types of natural resource, environmental, and human‐made capital stocks, a necessary and sufficient condition for permanently sustaining an optimal utility/consumption level is the stationarity of the current‐value Hamiltonian. For economies whose development is not exogenously and directly affected by time (i.e., time‐autonomous economies), this stationarity condition generalizes Dixit et al.’s (1980) “zero‐net‐aggregate‐investment” rule of sustain‐ability, which in turn generalizes Solow‐Hartwick’s sustainability rule. For non‐autonomous economies, the stationarity condition is not generally fulfilled, and the current‐value Hamiltonian under ( over ) estimates the true welfare level by an amount equal to the discounted value of the net “ pure time effect .” For the non‐autonomous case of a time‐dependent utility discount rate , a general condition on the discount rate function (of which the hyperbolic discount rate function is a special case) upholds the results obtained for autonomous cases. The paper concludes with a discussion of policies that promote both optimality and sustainability objectives.