Optimal investment allocation in decentralized markets

Abstract

This paper makes three contributions to the Feldman-Mahalanobis (F-M) model. First, it overcomes the limitation of the original model, which assumes a passive role of consumption demand, by extending the F-M model through the introduction of intertemporal maximization of consumption. Second, it shows that decentralized markets can mimic the dynamic behavior of the centrally planned economy with two sectors, consumption and investment goods. This is accomplished by using Cobb-Douglas production functions in both sectors. Third, in contrast with the F-M model in which the solutions are unstable, this paper proves the stability of the steady state solutions.