(pp. 10-22)

The studies in this book use information about preferences from research on individual behavior. Consider the standard intertemporal consumption–hours problem without unemployment,

${\text{max}}\;{\mathbb{E}_t}\;\sum\limits_{\tau \, = \,0}^\infty {{\delta ^\tau }U\,({c_{t\, + \,\tau }},\;{h_{t\, + \,\tau }}),} $(2.1)

subject to the budget constraint,

$\sum\limits_{\tau \, = \,0}^\infty {{R_{t,\,\tau }}({w_{t\, + \,\tau }}\,{h_{t\, + \,\tau }} - {C_{t\, + \,\tau }}) = 0} $. (2.2)

Here${R_{t,\,\tau }}$is the price at time 𝘁 of a unit of goods delivered at time$t\; + \;\tau $.

I let$c\,(\lambda ,\,\lambda \,w)$be the Frisch consumption demand and$h\,(\lambda ,\,\lambda \,w)$be the Frisch supply of hours per worker. See Browning et al. (1985) for a complete discussion of Frisch systems in general. The functions satisfy

${U_c}(c\,(\lambda ,\,\lambda \,w),\;h\,(\lambda ,\,\lambda \,w))\; = \;\lambda $(2.3)

and

${U_h}(c\,(\lambda ,\,\lambda \,w),\;h\,(\lambda ,\,\lambda \,w))\; = - \,\lambda w$. (2.4)

Here$\lambda $is the Lagrange multiplier for the budget constraint.

The...