Saturday, March 12, 2016

Robert Hall on Forward-Looking Decision Making

As I have had an interest in this book before, I read it through just now. The author is a prominent economist of Stanford. He writes the basic principles of Dynamic Programming (DP) used in economic theory and the parameters used in the following models in this book, and then issues on health, insurance, labor, risk and government-guaranteed debt through the lens of DP.

I like Chapter 3 on health best of all. This is based on Hall and Jones(2007), QJE and asks and tackles why the health spending has been rising in the United States. This is the very serious issue not only in the US but also in Japan, my lovely and rapidly aging country.

The author tells the health spending rises over time as income grows if the marginal utility of consumption fall sufficiently rapidly relative to the joy of living an extra year (pp31) and shows it through the model built by DP. This is highly recommended for students and policymakers who have a great interest in health issue.

I studied DP as a graduate student and could read this book. It is better to know how to build the dynamic models by DP. That is, building the Bellman equation,

V(K)=max{C^(1-γ)/(1-γ)+βEV(K')}

and deriving the Euler equation,
RβE(C'/C)^(-γ)=1
is best for readers to grasp the contents of the book.

I would like the author to write more on DP for beginners, and the models introduced in the book, but it is true that shorter book is accessible to read. This is a highly recommended sub text or book for econ and business graduate, upper-level undergraduate students and econ or public policy researchers.

(This post is the English-translated version of the previous post, 12/03/2016.)

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