Additive habit formation: Consumption in incomplete markets with random endowments
AbstractWe provide a detailed characterization of the optimal consumption stream for the additive habit-forming utility maximization problem, in a framework of general discrete-time incomplete markets and random endowments. This characterization allows us to derive the monotonicity and concavity of the optimal consumption as a function of wealth, for several important classes of incomplete markets and preferences. These results yield a deeper understanding of the fine structure of the optimal consumption and provide a further theoretical support for the classical conjectures of Keynes (1936).
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1106.2980.
Date of creation: Jun 2011
Date of revision: Sep 2011
Publication status: Published in Mathematics and Financial Economics 5(2), 67--99, 2011
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-25 (All new papers)
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- Roman Muraviev, 2011. "Additive habits with power utility: Estimates, asymptotics and equilibrium," Papers 1108.2889, arXiv.org.
- Xiang Yu, 2011. "Utility Maximization with Addictive Consumption Habit Formation in Incomplete Semimartingale Markets," Papers 1112.2940, arXiv.org, revised Jul 2012.
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