A closed-form solution to the continuous-time consumption model with endogenous labor income
In this paper, we study an intertemporal maximization problem of an infinitely-lived individual who faces both labor income and asset return uncertainty. Given the growth rate of wage, the uncertainty of labor income is caused by the stochastic labor supply which is to be determined upon the available market information. Closed forms of consumption, labor supply and portfolio are obtained analytically by means of the martingale method. The Euler equation under uncertainty is established.
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- Mason, Robin & Wright, Stephen, 2001.
"The effects of uncertainty on optimal consumption,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 25(1-2), pages 185-212, January.
- Mason, R. & Wright, S., 1999. "The effects of uncertainty on optimal consumption," Discussion Paper Series In Economics And Econometrics 9907, Economics Division, School of Social Sciences, University of Southampton.
- Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, vol. 87(2), pages 267-272, May.
- Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
- Pitchford, John, 1991. "Optimum responses of the current account when income is uncertain," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 285-296, April.
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