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On the Proportionality and Homogeneity of Consumption and Income

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  • Avner Bar-Ilan

Abstract

In its certainty equivalence form, consumption is proportional to the sum of human and non-human wealth. With labour income uncertainty the proportionality takes the form of homogeneity of consumption with respect to the components of wealth. In this paper we analyse the stochastic properties of labour income that yield the homogeneity property as the utility-maximizing solution. A sufficient condition is derived on the way in which a certain income shift preserves the homogeneity property. This condition can hold for some geometric processes where the logarithm of labour income is modelled as ARMA ('k, l'). For other income processes the response of consumption to a certain income innovation may be larger, which appears as excess sensitivity.

Suggested Citation

  • Avner Bar-Ilan, 1995. "On the Proportionality and Homogeneity of Consumption and Income," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4b), pages 1153-1160, November.
  • Handle: RePEc:cje:issued:v:28:y:1995:i:4b:p:1153-60
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    Cited by:

    1. repec:oup:oxecpp:v:69:y:2017:i:4:p:1101-1119. is not listed on IDEAS
    2. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.
    3. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004. "Do the Rich Save More?," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 397-444, April.
    4. Bertaut, Carol C. & Haliassos, Michael, 1997. "Precautionary portfolio behavior from a life-cycle perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1511-1542, June.

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