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Saving Rates and Portfolio Choice with Subsistence Consumption

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  • Carolina Achury
  • Sylwia Hubar
  • Christos Koulovatianos

Abstract

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in stocks by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant .keeping-up with the Joneses. weighted average consumption playing the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say.

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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 10/01.

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Handle: RePEc:not:notcfc:10/01

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Keywords: elasticity of intertemporal substitution; Stone-Geary preferences; two-asset portfolio; household portfolios; wealth inequality; controlled diffusion.;

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Cited by:
  1. Levaggi, Rosella & Menoncin, Francesco, 2013. "Optimal dynamic tax evasion," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(11), pages 2157-2167.

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