Recursive Economics - Differences Between Recursive and Neoclassical Paradigms

Differences Between Recursive and Neoclassical Paradigms

The neoclassical model assumes a one-period utility maximization for a consumer and one-period profit-maximization by a producer. The adjustment that occurs within that single time period is a subject of considerable debate within the field, and is often left unspecified. A time-series path in the neoclassical model is a series of these one-period utility maximizations.

In contrast, a recursive model involves two or more periods, in which the consumer or producer trades off benefits and costs across the two time periods. This trade-off is sometimes represented in what is called a Euler equation. A time-series path in the recursive model is the result of a series of these two-period decisions.

In the neoclassical model, the consumer or producer maximizes utility (or profits). In the recursive model, the subject maximizes value or welfare, which is the sum of current rewards or benefits and discounted future expected value.