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Concave Consumption Function under Borrowing

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  • Richard M. H. Suen

    () (Department of Economics, University of California Riverside)

Abstract

This 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 Öndings. 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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File URL: http://economics.ucr.edu/repec/ucr/wpaper/10-07.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201007.

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Date of creation: Aug 2010
Date of revision: Aug 2010
Handle: RePEc:ucr:wpaper:201007

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Keywords: Consumption function; borrowing constraints; precautionary saving;

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