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Optimal consumption under uncertainty, liquidity constraints, and bounded rationality

I study how boundedly rational agents can learn the solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. I present conditions for the existence of an optimal linear consumption rule and characterize it. Additionally, I use an empirically plausible theory of learning to generate a class of adaptive learning algorithms that converges to the optimal rule. This provides an adaptive and boundedly rational foundation to neoclassical consumption theory.

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File URL: ftp://ftp1.economics.smu.edu/WorkingPapers/2012/OZAK/OZAK-2012-04.pdf
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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 1204.

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Date of creation: May 2012
Date of revision:
Handle: RePEc:smu:ecowpa:1204
Contact details of provider: Postal:
Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496

Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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  1. Carroll, Christopher D., 2011. "Theoretical foundations of buffer stock saving," CFS Working Paper Series 2011/15, Center for Financial Studies (CFS).
  2. Tilman Börgers & Rajiv Sarin, . "Learning Through Reinforcement and Replicator Dynamics," ELSE working papers 051, ESRC Centre on Economics Learning and Social Evolution.
  3. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc.
  4. Selten, Reinhard & Stoecker, Rolf, 1986. "End behavior in sequences of finite Prisoner's Dilemma supergames A learning theory approach," Journal of Economic Behavior & Organization, Elsevier, vol. 7(1), pages 47-70, March.
  5. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
  6. Todd W. Allen & Christopher D. Carroll, 2001. "Individual Learning About Consumption," NBER Working Papers 8234, National Bureau of Economic Research, Inc.
  7. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
  8. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695, December.
  9. Harald Uhlig & Martin Lettau, 1999. "Rules of Thumb versus Dynamic Programming," American Economic Review, American Economic Association, vol. 89(1), pages 148-174, March.
  10. Alexander L. Brown & Zhikang Eric Chua & Colin F. Camerer, 2009. "Learning and Visceral Temptation in Dynamic Saving Experiments," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 197-231.
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