THE FUNDAMENTAL PRINCIPLE OF INTERTEMPORAL OPTIMIZATION - CONSUMER-BEHAVIOR UNDER RECURSIVE PREFERENCES

This paper shows that a simple principle, expressible by a single equa tion, runs through intertemporal consumer behavior: the effect of any given variations of consumption on the utility must be balanced agains t the effect of such variations on subsequent stocks of assets. The fo rmer is measured by the directional marginal utility and the latter by the directional marginal value of assets; the implicit utility price of assets, necessary to convert the latter into utility units, is then determined in reference to the maximized value of the utility functio nal. It is this equation that is implied by Pontryagin's maximum princ iple.