Published Mar 22, 2024 Jaimovich–Rebelo preferences represent a set of preferences in economic modeling that deviate from traditional utility functions by introducing non-separable preferences in consumption and leisure. This theoretical construct allows for a more nuanced analysis of the effects of technological progress and policy changes on labor supply, consumption, and economic growth. Developed by economists Nir Jaimovich and Sergio Rebelo, these preferences highlight the importance of smooth consumption over time and the interplay between consumption and leisure choices in individual decision-making. In the traditional utility models, consumption and leisure are often treated as separate, additive components of utility functions. However, Jaimovich–Rebelo preferences propose that consumption and leisure are complementary; the enjoyment of leisure time increases with the level of consumption and vice versa. This non-separable nature implies that individuals’ utility from consumption at any given time is affected by their amount of leisure, thereby affecting labor supply decisions and overall economic dynamics. Consider an economy where a new technology significantly increases productivity. With traditional utility functions, an increase in productivity directly leads to an ambiguous effect on labor supply: workers might choose to work more due to higher wages, or they might opt for more leisure, as they can maintain the same consumption level with less work. However, under Jaimovich–Rebelo preferences, the increase in productivity not only allows for higher consumption but also makes leisure more valuable (since individuals prefer enjoying their free time with a higher level of consumption). This can lead to a more substantial shift towards leisure, affecting the overall labor supply in the economy more dramatically than traditional models might predict. The introduction of Jaimovich–Rebelo preferences in economic models provides several important insights for policy making and understanding economic growth. Firstly, it suggests that technological progress and policy changes can have non-linear effects on labor supply, consumption, and savings. Secondly, it underscores the importance of considering the interdependence between consumption and leisure in analyzing economic policies. Lastly, by highlighting the role of smooth consumption over time, it touches upon the significance of ensuring that economic growth translates into improved quality of life, not just increased output. Jaimovich–Rebelo preferences differ from traditional utility functions by emphasizing the complementary relationship between consumption and leisure, rather than treating them as separate and additive components. This approach allows for more dynamic and nuanced modeling of economic behaviors and outcomes. Economic policies aimed at stimulating productivity, consumption, or labor supply need to consider the interdependence between consumption and leisure. For instance, policies promoting work-life balance may have different impacts under Jaimovich–Rebelo preferences, as they directly affect the utility derived from both consumption and leisure, potentially encouraging more sustainable economic growth. Yes, Jaimovich–Rebelo preferences can provide explanations for several observed economic phenomena that traditional utility functions struggle with, such as why labor supply might not increase proportionally with productivity growth, or why consumption patterns may change significantly with economic development. This model brings to light the complexities of human behavior in economic decision-making, particularly around the trade-offs between work, consumption, and leisure. In conclusion, the introduction of Jaimovich–Rebelo preferences into economic models enriches our understanding of the dynamics between consumption, leisure, and labor supply. It offers a framework for examining the intricacies of human behavior in economic decision-making and the diverse impacts of policy and technological changes on the economy.Definition of Jaimovich–Rebelo preferences
Understanding the Model
Example
Why Jaimovich–Rebelo Preferences Matter
Frequently Asked Questions (FAQ)
How do Jaimovich–Rebelo preferences compare to traditional utility functions?
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Can Jaimovich–Rebelo preferences help explain observed economic phenomena?
Economics