W.K.Y. Fung et al Journal of Development Economics 61(2000)111-135 the entrepreneurs(indexed by a superscript e), and the second type will be referred to as the non-entrepreneurs (indexed by a superscript n) The individuals of all generations have identical preferences on consumption or simplicity, it is assumed that individuals value consumption only when they are old. The preferences of an individual of generation t are characterized by the utility function U(C14,Cr+1C计+2)=CH2,i=e,n,Vt≥1 (1) Note that the first superscript indicates which generation the individual belongs to, the second superscript indicates his type, and the subscript indicates which riod the individual lives in. Since the individuals value consumption only when old, they save their labor income made when young by holding money, bank deposits, government bonds, and/or the capital good in the second period of their ives. Further, because consumption must be paid in cash, old individuals finance their consumption by the cash balance carried over from the second period of their ves There are two types of commodities being produced in the economy: a non-storable consumption good and a capital good. The markets for trading the two types of commodities are perfectly competitive. The nominal price of the tal good and consumption good in period t are denoted by Pk and P espectively. The capital good is produced by an investment technology, which converts one unit of the consumption good into one unit of the capital good without using the inputs of labor effort. Thus, the nominal prices of the two goods are always equal, PI=P For simplicity, it is assumed that the capital good depreciates completely after the production processes have been completed By the nature of ownership, there are two types of producers in the consump- tion good industry: the private firms (indexed by a superscript p) owned by the entrepreneurs and the state-owned enterprises(indexed by a superscript s)owned by the government. In the state sector, the number of firms is a measure of one and the number of firms in the private sector is a measure of A Production of the consumption good requires the inputs of capital and labor effort. In order to produce the consumption good in period t+ l, the firms must install the capital good at the end of period t. It is assumed that the capital good must be paid when purchases are made but workers are paid only after the production processes are completed. That is, there exists a cash-in-advance (liquidity) constraint on hiring capital but not on hiring labor 18T1 equired to simplify the problem so that analytical solutions can be obtained. ption, we do not have to worry about how individuals allocate their income or current and savings. a more detailed discussion on how changi affect our results will be presented in Section 5.2118 M.K.Y. Fung et al.rJournal of DeÕelopment Economics 61 2000 111–135 ( ) the entrepreneurs indexed by a superscript e , and the second type will be referred Ž . to as the non-entrepreneurs indexed by a superscript n . Ž . The individuals of all generations have identical preferences on consumption. For simplicity, it is assumed that individuals value consumption only when they are old. 18 The preferences of an individual of generation t are characterized by the utility function: U t,i Ct,i ,Ct,i ,Ct,i sCt,i Ž . , ise,n, ;tG1. 1Ž . t tq1 tq2 tq2 Note that the first superscript indicates which generation the individual belongs to, the second superscript indicates his type, and the subscript indicates which period the individual lives in. Since the individuals value consumption only when old, they save their labor income made when young by holding money, bank deposits, government bonds, andror the capital good in the second period of their lives. Further, because consumption must be paid in cash, old individuals finance their consumption by the cash balance carried over from the second period of their lives. There are two types of commodities being produced in the economy: a non-storable consumption good and a capital good. The markets for trading the two types of commodities are perfectly competitive. The nominal price of the capital good and consumption good in period t are denoted by P k and P , t t respectively. The capital good is produced by an investment technology, which converts one unit of the consumption good into one unit of the capital good without using the inputs of labor effort. Thus, the nominal prices of the two goods are always equal, Pt t ksP . For simplicity, it is assumed that the capital good depreciates completely after the production processes have been completed. By the nature of ownership, there are two types of producers in the consump￾tion good industry: the private firms indexed by a superscript p owned by the Ž . entrepreneurs and the state-owned enterprises indexed by a superscript s owned Ž . by the government. In the state sector, the number of firms is a measure of one, and the number of firms in the private sector is a measure of u. Production of the consumption good requires the inputs of capital and labor effort. In order to produce the consumption good in period tq1, the firms must install the capital good at the end of period t. It is assumed that the capital good must be paid when purchases are made but workers are paid only after the production processes are completed. That is, there exists a cash-in-advance Ž . liquidity constraint on hiring capital but not on hiring labor. 18 This assumption is required to simplify the problem so that analytical solutions can be obtained. With this simplifying assumption, we do not have to worry about how individuals allocate their income for current consumption and savings. A more detailed discussion on how changing this assumption will affect our results will be presented in Section 5.2