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Saving Rates and Portfolio Choice with Subsistence Consumption

Author

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  • Carolina Achury

    (University of Exeter)

  • Sylwia Hubar

    (University of Exeter)

  • Christos Koulovatianos

    (University of Nottingham)

Abstract

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in risky assets by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant "keeping-up-with-the-Joneses" weighted average consumption which plays the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say. (Copyright: Elsevier)

Suggested Citation

  • Carolina Achury & Sylwia Hubar & Christos Koulovatianos, 2012. "Saving Rates and Portfolio Choice with Subsistence Consumption," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 108-126, January.
    • Handle: RePEc:red:issued:10-11
    DOI: 10.1016/j.red.2011.01.002
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    3. Fortin, Ines & Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2016. "The Consumption-Investment Decision of a Prospect Theory Household," Economics Series 322, Institute for Advanced Studies.
    4. Russell Cooper & Guozhong Zhu, 2016. "Household Finance over the Life-Cycle: What does Education Contribute?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 63-89, April.
    5. Antony, Jürgen & Klarl, Torben, 2023. "Subsistence consumption and natural resource depletion: Can resource-rich low-income countries realize sustainable consumption paths?," Journal of Macroeconomics, Elsevier, vol. 77(C).
    6. Ricardo Bebczuk & Leonardo Gasparini & Noelia Garbero & Julian Amendolaggine, 2015. "Understanding the Determinants of Household Saving: Micro Evidence for Latin America," CEDLAS, Working Papers 0189, CEDLAS, Universidad Nacional de La Plata.
    7. Hlouskova, Jaroslava & Fortin, Ines & Tsigaris, Panagiotis, 2017. "The consumption–investment decision of a prospect theory household: A two-period model," Journal of Mathematical Economics, Elsevier, vol. 70(C), pages 74-89.
    8. Studer, Sabrina & Falkinger, Josef & Zhao, Yingnan, 2015. "Explaining structural changes towards and within the financial sector," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113004, Verein für Socialpolitik / German Economic Association.
    9. Li, Qian & Shim, Myungkyu & Wen, Yongheng, 2017. "The implication of subsistence consumption for economic welfare," Economics Letters, Elsevier, vol. 158(C), pages 30-33.
    10. Christos Koulovatianos & Carsten Schröder, 2023. "Income-dependent equivalence scales and choice theory: implications for poverty measurement," Chapters, in: Jacques Silber (ed.), Research Handbook on Measuring Poverty and Deprivation, chapter 4, pages 39-49, Edward Elgar Publishing.
    11. Hlouskova, Jaroslava & Fortin, Ines & Tsigaris, Panagiotis, 2019. "The consumption–investment decision of a prospect theory household: A two-period model with an endogenous second period reference level," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 93-108.
    12. Milton Camelo Rincón & Jacobo Campo Robledo, 2016. "Modelo de consumo de vivienda óptimo: estimaciones para Bogotá," Revista Facultad de Ciencias Económicas, Universidad Militar Nueva Granada, vol. 25(1), pages 75-93, December.
    13. Erauskin, Iñaki & Gardeazabal, Javier, 2017. "The terms of trade, the external balance, and the size of the net foreign asset position," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 245-260.
    14. Francesco Menoncin & Stefano Nembrini, 2018. "Stochastic continuous time growth models that allow for closed form solutions," Journal of Economics, Springer, vol. 124(3), pages 213-241, July.
    15. Erauskin, Iñaki, 2015. "Savings, the size of the net foreign asset position, and the dynamics of current accounts," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 353-370.
    16. Antony, Jürgen & Klarl, Torben, 2019. "Resource depletion in a Ramsey economy with subsistence consumption, exogenous technical change and capital depreciation: A full characterization," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203640, Verein für Socialpolitik / German Economic Association.
    17. Gamannossi degl’Innocenti, Duccio & Levaggi, Rosella & Menoncin, Francesco, 2022. "Tax avoidance and evasion in a dynamic setting," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 443-456.
    18. Levaggi, Rosella & Menoncin, Francesco, 2013. "Optimal dynamic tax evasion," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2157-2167.
    19. Koulovatianos, Christos & Schröder, Carsten & Schmidt, Ulrich, 2019. "Do demographics prevent consumption aggregates from reflecting micro-level preferences?," European Economic Review, Elsevier, vol. 111(C), pages 166-190.
    20. Jürgen Antony & Torben Klarl, 2019. "Non-Renewable Resources in a Ramsey Economy with Subsistence Consumption, Human and Physical Capital Accumulation: A full Characterization," Bremen Papers on Economics & Innovation 1904, University of Bremen, Faculty of Business Studies and Economics.
    21. Sangyup Choi & Myungkyu Shim, 2018. "Labor Market Dynamics in Developing Economies: the Role of Subsistence Consumption," Working papers 2018rwp-127, Yonsei University, Yonsei Economics Research Institute.
    22. Antony, Jürgen & Klarl, Torben, 2022. "Poverty and sustainable development around the world during transition periods," Energy Economics, Elsevier, vol. 110(C).

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    More about this item

    Keywords

    Elasticity of intertemporal substitution; Stone-Geary preferences; Two-asset portfolio; Household portfolios; Wealth inequality; Controlled diffusion;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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