Research Discussion Paper – RDP 35 A Theoretical Intertemporal Choice Model of the Household


A theory of representative household behaviour based on multi-period utility maximisation is set out. The model is general and attempts to focus both on the intertemporal nature of many household decisions and on the interdependence at any point in time of various real and financial choices.

An aim of the paper is to avoid premature specification of the form of the utility function (except for intertemporal additivity). This enables the derivation of general dynamic marginal utility conditions. To derive empirically implementable estimating equations, the utility function is later approximated by a quadratic. The implied adjustment dynamics of these equations are surprisingly simple, since they collapse to a simple partial adjustment framework, even for the very general utility function specifications.