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Additive habit formation: Consumption in incomplete markets with random endowments

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  • Roman Muraviev

Abstract

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).

Suggested Citation

  • Roman Muraviev, 2011. "Additive habit formation: Consumption in incomplete markets with random endowments," Papers 1106.2980, arXiv.org, revised Sep 2011.
  • Handle: RePEc:arx:papers:1106.2980
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    File URL: http://arxiv.org/pdf/1106.2980
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    Cited by:

    1. Xiang Yu, 2014. "Optimal Consumption under Habit Formation In Markets with Transaction Costs and Random Endowments," Papers 1408.1382, arXiv.org, revised Jul 2016.
    2. Xiang Yu, 2011. "Utility maximization with addictive consumption habit formation in incomplete semimartingale markets," Papers 1112.2940, arXiv.org, revised May 2015.
    3. Roman Muraviev, 2011. "Additive habits with power utility: Estimates, asymptotics and equilibrium," Papers 1108.2889, arXiv.org.

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