World Library  
Flag as Inappropriate
Email this Article

Greenwood–Hercowitz–Huffman preferences

Article Id: WHEBN0016935274
Reproduction Date:

Title: Greenwood–Hercowitz–Huffman preferences  
Author: World Heritage Encyclopedia
Language: English
Subject: Utility, King–Plosser–Rebelo preferences, Macroeconomics
Collection: MacRoeconomics, Utility, Utility Function Types
Publisher: World Heritage Encyclopedia
Publication
Date:
 

Greenwood–Hercowitz–Huffman preferences

Greenwood–Hercowitz–Huffman preferences are a particular functional form of utility developed by Jeremy Greenwood, Zvi Hercowitz, and Gregory Huffman, in their 1988 paper Investment, Capacity Utilization, and the Real Business Cycle.[1] It describes the macroeconomic impact of technological changes that affect the productivity of new capital goods. The paper also introduced the notions of investment-specific technological progress and capacity utilization into modern macroeconomics.

GHH preferences have Gorman form.

Often macroeconomic models assume that agents' utility is additively separable in consumption and labor. I.e., frequently the period utility function is something like

u(c,l) = \frac{c^{1-\gamma}}{1-\gamma}- \psi \frac{l^{1+\theta}}{1+\theta}

where c is consumption and l is labor (e.g., hours worked). Note that this is separable in that the utility (loss) from working does not directly affect the utility (gain or loss) from consumption, i.e. the cross-derivative of utility with respect to consumption and labor is 0.

GHH preferences might instead have a form like:

u(c,l) = \frac{1}{1-\gamma}\left(c - \psi \frac{l^{1+\theta}}{1+\theta} \right)^{1-\gamma}

where now consumption and labor are not additively separable in the same way. For an agent with this utility function, the amount she/he works will actually affect the amount of utility she/he receives from consumption, i.e. the cross-derivative of utility with respect to consumption and labor is unequal to 0.

More generally, the preferences are of the form

u(c,l) = U\left(c - G(l)\right), U'>0, U''<0, G'>0, G''>0.

The first order condition of u(c,l) with respect l is given by

U'\left(c - G(l)\right)\left(\frac{dc}{dl} - G'(l) \right) = 0

which implies

\frac{dc}{dl} = G'(l).

As dc/dl is typically just a wage w, this means the labor choice l is a function of only the wage and has a closed form with l = G'^{-1}(w). As a result, the preferences are exceptionally convenient to work with. Moreover, as the marginal rate of substitution is independent of consumption and only depends on the real wage, there is no wealth effect on the labour supply. Using preference without a wealth effect on the labour supply might help to explain the aggregate economic behaviour following news shocks,[2] and government spending shocks.[3] Their use is also very common in open macro studies.[4]

Generalization: Jaimovich–Rebelo preferences

GHH preferences are not consistent with a balanced growth path. Jaimovich and Rebelo proposed a preference specification that allows scaling the short-run wealth effect on the labor supply.[5] The two polar cases are the standard King–Plosser–Rebelo preferences[6] and the GHH-preferences.

References

  • Jeremy Greenwood, Zvi Hercowitz and Gregory W. Huffman (1988) "Investment, capacity utilization, and the real business cycle" (Jeremy Greenwood's website) American Economic Review 78 (3): 402-17.

References

  1. ^ An archive for the original research is here: http://hdl.handle.net/1802/2688
  2. ^
  3. ^
  4. ^
  5. ^
  6. ^
This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. World Heritage Encyclopedia content is assembled from numerous content providers, Open Access Publishing, and in compliance with The Fair Access to Science and Technology Research Act (FASTR), Wikimedia Foundation, Inc., Public Library of Science, The Encyclopedia of Life, Open Book Publishers (OBP), PubMed, U.S. National Library of Medicine, National Center for Biotechnology Information, U.S. National Library of Medicine, National Institutes of Health (NIH), U.S. Department of Health & Human Services, and USA.gov, which sources content from all federal, state, local, tribal, and territorial government publication portals (.gov, .mil, .edu). Funding for USA.gov and content contributors is made possible from the U.S. Congress, E-Government Act of 2002.
 
Crowd sourced content that is contributed to World Heritage Encyclopedia is peer reviewed and edited by our editorial staff to ensure quality scholarly research articles.
 
By using this site, you agree to the Terms of Use and Privacy Policy. World Heritage Encyclopedia™ is a registered trademark of the World Public Library Association, a non-profit organization.
 



Copyright © World Library Foundation. All rights reserved. eBooks from World Library are sponsored by the World Library Foundation,
a 501c(4) Member's Support Non-Profit Organization, and is NOT affiliated with any governmental agency or department.