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Optimal Consumption Policy under Uncertain Income

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Author Info

  • Haim Mendelson

    (University of Rochester)

  • Yakov Amihud

    (Tel Aviv University and New York University)

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    Abstract

    This paper considers the consumption behavior of a risk-averse consumer with a preference for immediate consumption who faces an uncertain income stream and plans for a finite or infinite number of periods. The consumer may borrow up to a limit or save, where both saving and borrowing are subject to the same positive rate of interest. We derive the optimal consumption policies for both finite and infinite planning horizons, investigate their characteristics, and analyze their economic and behavioral implications.

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    File URL: http://dx.doi.org/10.1287/mnsc.28.6.683
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 28 (1982)
    Issue (Month): 6 (June)
    Pages: 683-697

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    Handle: RePEc:inm:ormnsc:v:28:y:1982:i:6:p:683-697

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    Related research

    Keywords: finance-consumption; economics-utility theory; dynamic programming;

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    Cited by:
    1. Schreiner, Mark & Graham, Douglas H. & Miranda, Mario J., 1995. "The Effects On Peasant Households Of Access To Formal Deposits And Loans," Economics and Sociology Occasional Papers 28329, Ohio State University, Department of Agricultural, Environmental and Development Economics.
    2. Wilson, Bonnie, 2003. "Diversification of risk and saving," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(4), pages 697-712.
    3. Nikolaj Malchow-Moeller & Bo Jellesmark Thorsen, . "A Dynamic Agricultural Household Model with Uncertain Income and Irreversible and Indivisible Investments under Credit Constraints," Economics Working Papers 2000-7, School of Economics and Management, University of Aarhus.
    4. Martin Browning & Thomas F. Crossley, 2000. "The Life Cycle Model of Consumption and Saving," Social and Economic Dimensions of an Aging Population Research Papers 28, McMaster University.
    5. Richard M. H. Suen, 2011. "Concave Consumption Function and Precautionary Wealth Accumulation," Working papers 2011-23, University of Connecticut, Department of Economics.
    6. Huggett, Mark & Vidon, Edouard, 2002. "Precautionary wealth accumulation: a positive third derivative is not enough," Economics Letters, Elsevier, vol. 76(3), pages 323-329, August.
    7. Mark Huggett, 2004. "Precautionary Wealth Accumulation," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 769-781.
    8. Huggett, Mark & Ospina, Sandra, 2001. "Aggregate precautionary savings: when is the third derivative irrelevant?," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 373-396, October.

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