Dusenberry's Ratcheting of Consumption: Optimal Dynamic Consumption and Investment Given Intolerance for Any Decline in Standard of Living
J. S. Duesenberry's (1949) ratcheting consumption demand is derived as a feature of the optimal dynamic consumption and investment policy given extreme habit formation that prevents consumption from falling over time. Preferences are in effect non-time-separable, extended-real-valued von Neumann-Morgenstern preferences. Consumption increases each time wealth reaches a new maximum. Risky investment is proportional to the excess of wealth over the perpetuity value of current consumption. Extensions constrain the net rate of decrease in consumption with a constant other than zero, add more consumption goods, and constrain on the maximal holding of the risky asset as a proportion of wealth. Copyright 1995 by The Review of Economic Studies Limited.
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Volume (Year): 62 (1995)
Issue (Month): 2 (April)
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