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A closed-form solution to the continuous-time consumption model with endogenous labor income

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  • Aihua Zhang
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    Abstract

    In this paper, we study an intertemporal maximization problem of an infinitely-lived individual who faces both labor income and asset return uncertainty. Given the growth rate of wage, the uncertainty of labor income is caused by the stochastic labor supply which is to be determined upon the available market information. Closed forms of consumption, labor supply and portfolio are obtained analytically by means of the martingale method. The Euler equation under uncertainty is established.

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    Bibliographic Info

    Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0710.

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    Date of creation: Sep 2007
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    Handle: RePEc:san:crieff:0710

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    Keywords: Consumption; Labor Supply; Portfolio; Euler equation; Martingale;

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    1. Mason, Robin & Wright, Stephen, 2001. "The effects of uncertainty on optimal consumption," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 185-212, January.
    2. Chang,Fwu-Ranq, 2009. "Stochastic Optimization in Continuous Time," Cambridge Books, Cambridge University Press, number 9780521541947, April.
    3. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    4. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, vol. 87(2), pages 267-272, May.
    5. Pitchford, John, 1991. "Optimum responses of the current account when income is uncertain," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 285-296, April.
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