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Additive habit formation: Consumption in incomplete markets with random endowments

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  • Roman Muraviev
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    Abstract

    We 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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    File URL: http://arxiv.org/pdf/1106.2980
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1106.2980.

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    Date of creation: Jun 2011
    Date of revision: Sep 2011
    Publication status: Published in Mathematics and Financial Economics 5(2), 67--99, 2011
    Handle: RePEc:arx:papers:1106.2980

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    Web page: http://arxiv.org/

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    Cited by:
    1. Xiang Yu, 2011. "Utility Maximization with Addictive Consumption Habit Formation in Incomplete Semimartingale Markets," Papers 1112.2940, arXiv.org, revised Apr 2014.
    2. Roman Muraviev, 2011. "Additive habits with power utility: Estimates, asymptotics and equilibrium," Papers 1108.2889, arXiv.org.

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