ENDOGENOUS BUSINESS CYCLES: THE INFLUENCE OF CHARACTER TRAITS*

Abstract

This article deals with how business cycles can occur, in light of character traits which influence individual behaviour in an economy. We assume an overlapping generations model in which every consumer has identical instantaneous utility which is additively separable with respect to time. The parameters of utility here include character traits which influence the choice between consumption and savings. In this situation, young individuals choose between current consumption and current savings which lead to future consumption in their old age. Individual character traits, which appear both in the shape of utility functions and in evaluations about utility in the future, affect these choices. And since these choices determine savings, individual character traits can eventually determine how our economy moves. Focusing on the relationship between individual character traits and savings formation, we demonstrate that endogenous business cycles with two periods can occur, in an economy comprised of individuals who opt for current consumption and who are careless in relation to future events, like Aesopian grasshoppers, and in other cases they do not.