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Tractable Consumer Choice

We derive a rational model of separable consumer choice which can also serve as a behavioral model. The central construct is lambda, the marginal utility of money, derived from the consumer's rest-of-life problem. We present a robust approximation of lambda, and show how to incorporate liquidity constraints, indivisibilities and adaptation to a changing environment. We find connections with numerous historical and recent constructs, both behavioral and neoclassical, and draw contrasts with standard partial equilibrium analysis. The result is a better grounded, more flexible and more intuitive description

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 240.

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Length: 40
Date of creation: 03 Feb 2014
Date of revision:
Handle: RePEc:edn:esedps:240
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  1. Matthew Rabin, 2001. "Risk Aversion and Expected Utility Theory: A Calibration Theorem," Levine's Working Paper Archive 7667, David K. Levine.
  2. Martin Browning & Thomas F. Crossley, 2000. "Luxuries Are Easier to Postpone: A Proof," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1022-1026, October.
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  4. Richard J. Herrnstein & Drazen Prelec, 1991. "Melioration: A Theory of Distributed Choice," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 137-156, Summer.
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  11. Kim, H Youn, 1993. "Frisch Demand Functions and Intertemporal Substitution in Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 445-54, August.
  12. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
  13. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, March.
  14. David A. Love, 2013. "Optimal Rules of Thumb for Consumption and Portfolio Choice," Economic Journal, Royal Economic Society, vol. 123, pages 932-961, 09.
  15. Blundell, Richard & Browning, Martin & Meghir, Costas, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 57-80, January.
  16. Donald J. Brown & Caterina Calsamiglia, 2004. "The Strong Law of Demand," Yale School of Management Working Papers ysm336, Yale School of Management.
  17. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
  18. George J. Stigler, 1950. "The Development of Utility Theory. II," Journal of Political Economy, University of Chicago Press, vol. 58, pages 373.
  19. Biswas, Tapan, 1977. "The Marshallian Consumer," Economica, London School of Economics and Political Science, vol. 44(173), pages 47-56, February.
  20. Deaton, Angus, 1974. "A Reconsideration of the Empirical Implications of Additive Preferences," Economic Journal, Royal Economic Society, vol. 84(334), pages 338-48, June.
  21. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter.
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