Additive habit formation: Consumption in incomplete markets with random endowments
We provide a detailed characterization of the optimal consumption stream for the additive habit-forming utility maximization problem, in a framework of general discrete-time incomplete markets and random endowments. This characterization allows us to derive the monotonicity and concavity of the optimal consumption as a function of wealth, for several important classes of incomplete markets and preferences. These results yield a deeper understanding of the fine structure of the optimal consumption and provide a further theoretical support for the classical conjectures of Keynes (1936).
|Date of creation:||Jun 2011|
|Date of revision:||Sep 2011|
|Publication status:||Published in Mathematics and Financial Economics 5(2), 67--99, 2011|
|Contact details of provider:|| Web page: http://arxiv.org/|
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