Intertemporal Utility with Heterogeneous Goods and Constant Elasticity of Substitution

12 Pages Posted: 12 Jan 2020

See all articles by Martin Quaas

Martin Quaas

German Centre for Integrative Biodiversity Research (iDiv) Halle-Jena-Leipzig

Stefan Baumgärtner

University of Freiburg - Department of Environment and Natural Resources

Moritz A. Drupp

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Jasper Meya

Resource Economics Working Group, Humboldt University Berlin; Department of Economics, University of Oldenburg

Date Written: 2019

Abstract

We characterize intertemporal utility functions over heterogeneous goods that feature (i) a constant elasticity of substitution between goods at each point in time and (ii) a constant intertemporal elasticity of substitution for at least one of the goods. We find that a standard (stationary) intertemporal utility function is consistent with these two properties if and only if it either is of the intertemporal constant elasticity of substitution (ICES) form, that is, if all elasticities of substitution are identical, or if the instantaneous utility function is Cobb-Douglas. We also characterize the families of standard intertemporal utility functions that feature either (i) or (ii), but not the respective other property. The ICES utility function offers a simple and consistent solution for applications that use constant good-specific intertemporal substitutability. This is, for example, relevant for dual discounting of market and non-market goods.

Keywords: substitutability, CES, CIES, intertemporal utility, non-market goods

JEL Classification: D150, D610, Q510

Suggested Citation

Quaas, Martin and Baumgärtner, Stefan and Drupp, Moritz A. and Meya, Jasper, Intertemporal Utility with Heterogeneous Goods and Constant Elasticity of Substitution (2019). CESifo Working Paper No. 7999. Available at SSRN: https://ssrn.com/abstract=3517045

Martin Quaas (Contact Author)

German Centre for Integrative Biodiversity Research (iDiv) Halle-Jena-Leipzig ( email )

Deutscher Platz 5e
Leipzig, 04103
Germany

Stefan Baumgärtner

University of Freiburg - Department of Environment and Natural Resources ( email )

Tennebacher Str. 4
Freiburg, 79106
Germany

HOME PAGE: http://www.ere.uni-freiburg.de

Moritz A. Drupp

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Jasper Meya

Resource Economics Working Group, Humboldt University Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Department of Economics, University of Oldenburg ( email )

Oldenburg, D 26111
Germany

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