This paper analyzes life-cycle consumption plans and distinguishes between temporal risk aversion and intertemporal substitution. The results assume that felicity functions are quadratic and that income follows a linear model with normally distributed errors. Stochastic dynamic programming then yields closed-loop linear decision rules. Certainty equivalence no longer holds but instead households play a min-max strategy against nature. One finds a rationale for precautionary saving and a larger sensitivity of changes in consumption to income innovations. Copyright 1993 by The Review of Economic Studies Limited.
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Volume (Year): 60 (1993) Issue (Month): 2 (April) Pages: 385-95 Download reference. The following formats are available: HTML
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