Concave Consumption Function under Borrowing Constraints
AbstractThis paper analyzes the optimal consumption behavior of a consumer who faces uninsurable labor income risk and borrowing constraints. In particular, it provides conditions under which the decision rule for consumption is a concave function of existing assets. The current study presents two main findings. First, it is shown that the consumption function is concave if the period utility function is drawn from the HARA class and has either strictly positive or zero third derivative. Second, it is shown that the same result can be obtained for certain period utility functions that are not in the HARA class.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 24927.
Date of creation: Aug 2010
Date of revision:
Consumption function; borrowing constraints; precautionary saving;
Find related papers by JEL classification:
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-18 (All new papers)
- NEP-DGE-2010-09-18 (Dynamic General Equilibrium)
- NEP-UPT-2010-09-18 (Utility Models & Prospect Theory)
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