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The Markov Consumption Problem

  • Michael Sattinger

This paper develops a model of safety first consumption behavior in which the likelihood of survival to the next period depends on current consumption levels. Below a threshold asset level, individuals follow a decumulation path, and above that level they follow an accumulation path. Saving rates then vary discontinuously with asset level, generating a poverty trap and divergence in incomes. Reduction of risk raises saving rates. A more equitable distribution of assets can be consistent with greater aggregate savings and growth because of declining marginal propensity to save over some asset intervals.

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File URL: http://www.albany.edu/economics/research/workingp/2010/SafetyFirstConsumption.pdf
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Paper provided by University at Albany, SUNY, Department of Economics in its series Discussion Papers with number 10-03.

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Date of creation: 2010
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Handle: RePEc:nya:albaec:10-03
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Department of Economics, BA 110 University at Albany State University of New York Albany, NY 12222 U.S.A.

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