Financial Inclusion in Papua New Guinea
Intertemporal Trade: optimal allocation of consumption
over time
If HH is FI, can borrow / save
• HH trades-off resource costs of becoming FI (incurred in the current
period) against the benefits of a reduction in transaction costs now
and in the future and the ability to trade intertemporally.
Two period model: HH intertemporal utility:
=
U (E1, E2) In V1 (p, E1) + ẞ In V2 (p, E2)
• B = 1/ (1+p) is the discount rate: p the discount factor
▸ lower p (or higher B) more patient HH
E1 and E2 represent the household's expenditure in periods 1 and 2
Indirect utility function in any time period:
In V (p, Y) = In YfIn p (j) dj.
If HH is NFI then in both periods: E; = wL and HH utility is
UNF (E1, E2) = (1 + ß) In L − (1 + B) √ In a(j)dj
- d)(1 + t)
− (1 + ß) (1 − j† ) In a² (1 + d
Davies & Nettuno
Financial Inclusion in Papua New Guinea
590
August 4, 2022
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