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Peter J. Hammond
Introduction
VickreyMirrlees Model
Typical Problem
Economic Application
imply that:
I u 0 (c(n)) = and so c(n) = c ,
where the constant c uniquely solves u 0 (c ) =
(to each according to their need);
d`
I v 0 (`(n)) = F 0 (L)n, implying that v 00 (`(n)) = F 0 > 0,
dn
d`
so > 0 (from each according to their ability)
dn
Exercise
Use concavity arguments to prove
that this is the (essentially unique) solution.
What makes this solution practically infeasible?
It follows that
R
0 {[u(c(n)) v (`(n))] [u(c ) v (` (n))]}f (n) dn
[(C c ) F 0 (L )(L L )]
C c = F (L) F (L ) F 0 (L )(L L )
Introduction
VickreyMirrlees Model
Typical Problem
Economic Application
where for each t [t0 , t1 ], the partial derivatives Fx0 (t) and Fx0 (t)
of F (t, x, x) are evaluated at the triple (t, x (t), x (t)).
Introduction
VickreyMirrlees Model
Typical Problem
Economic Application
I = K = f (K ) C
U 00 (C )C e rt + rU 0 (C )e rt = e rt U 0 (C )f 0 (K )
U 00 (C )
C = f 0 (K ) r
U 0 (C )
d ln U 0 (C ) U 00 (C )C
(C ) := = 0
d ln C U (C )
This is related to the curvature of the utility function,
and to how quickly marginal utility U 0 (C ) decreases as C increases.
Rearranging the equation U 00 (C )C /U 0 (C ) = f 0 (K ) r yet again,
one obtains the equation
C
(C ) = f 0 (K ) r
C
whose left hand side is the proportional rate of consumption growth
multiplied by the elasticity of marginal utility,
or the elasticity of an intertemporal marginal rate of substitution.