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Optimal Consumption Policy under Uncertain Income

Author

Listed:
  • Haim Mendelson

    (University of Rochester)

  • Yakov Amihud

    (Tel Aviv University and New York University)

Abstract

This paper considers the consumption behavior of a risk-averse consumer with a preference for immediate consumption who faces an uncertain income stream and plans for a finite or infinite number of periods. The consumer may borrow up to a limit or save, where both saving and borrowing are subject to the same positive rate of interest. We derive the optimal consumption policies for both finite and infinite planning horizons, investigate their characteristics, and analyze their economic and behavioral implications.

Suggested Citation

  • Haim Mendelson & Yakov Amihud, 1982. "Optimal Consumption Policy under Uncertain Income," Management Science, INFORMS, vol. 28(6), pages 683-697, June.
    • Handle: RePEc:inm:ormnsc:v:28:y:1982:i:6:p:683-697
    DOI: 10.1287/mnsc.28.6.683
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    Citations

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    Cited by:

    1. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
    2. Shenghao Zhu, 2020. "Existence Of Stationary Equilibrium In An Incomplete‐Market Model With Endogenous Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1115-1138, August.
    3. Mark Huggett, 2004. "Precautionary Wealth Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 769-781.
    4. Nikolaj Malchow-Moeller & Bo Jellesmark Thorsen, "undated". "A Dynamic Agricultural Household Model with Uncertain Income and Irreversible and Indivisible Investments under Credit Constraints," Economics Working Papers 2000-7, Department of Economics and Business Economics, Aarhus University.
    5. Huggett, Mark & Vidon, Edouard, 2002. "Precautionary wealth accumulation: a positive third derivative is not enough," Economics Letters, Elsevier, vol. 76(3), pages 323-329, August.
    6. Schreiner, Mark & Graham, Douglas H. & Miranda, Mario, 1997. "Choices by Poor Households when the Interest Rate for Deposits Differs from the Interest Rate for loans," 1997 Conference, August 10-16, 1997, Sacramento, California 197056, International Association of Agricultural Economists.
    7. Wilson, Bonnie, 2003. "Diversification of risk and saving," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(4), pages 697-712.
    8. Suen, Richard M. H., 2011. "Concave consumption function and precautionary wealth accumulation," MPRA Paper 34774, University Library of Munich, Germany.
    9. Schreiner, Mark & Graham, Douglas H. & Miranda, Mario J., 1995. "The Effects On Peasant Households Of Access To Formal Deposits And Loans," Economics and Sociology Occasional Papers - ESO Series 28329, Ohio State University, Department of Agricultural, Environmental and Development Economics.
    10. Huggett, Mark & Ospina, Sandra, 2001. "Aggregate precautionary savings: when is the third derivative irrelevant?," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 373-396, October.

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