Optimal growth when tastes are inherited

We address the issue of optimal growth when standard-of-living aspirations are transmitted from one generation to the next. We derive the condition for the optimal solution to be stable in the saddle-point sense and show that this optimal solution may display damped oscillations even when the planner does not discount the utility of future generations (golden rule case). The decentralization of the optimal solution aims at correcting the inter-generational externality by use of an investment subsidy and allows one to avoid socially damaging rushes on consumption in expansion periods. It also allows one to stabilize output in the case of competitive economies displaying endogenous fluctuations. (C) 1999 Elsevier Science B.V. All rights reserved.