On the Concavity of the Consumption Function
Zeldes (1989) Carroll (1992; 1993), and others have shown that optimal consumption behavior for consumers facing income uncertainty can be remarkably different from the certainty-equivalent case. Carroll (1992; 1993) observes that many of the differences can be attributed to the concavity of the consumption function under uncertainty, but he does not describe the conditions under which the consumption function will be concave. We show that if labor income is stochastic, the consumption function will be concave for many commonly used utility functions, and if both labor income and capital income are stochastic, the consumption function is concave for an even broader group of utility functions.
|Date of creation:||10 Mar 1995|
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|Note:||13 pages, one figure, PostScript file. Need uudecode and a PostScript printer to print.|
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- Stephen Zeldes, .
"Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence,"
Rodney L. White Center for Financial Research Working Papers
20-86, Wharton School Rodney L. White Center for Financial Research.
- Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May.
- Carroll, Christopher D, 1997.
"Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis,"
The Quarterly Journal of Economics,
MIT Press, vol. 112(1), pages 1-55, February.
- Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
- Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
- Neave, Edwin H., 1971. "Multiperiod consumption-investment decisions and risk preference," Journal of Economic Theory, Elsevier, vol. 3(1), pages 40-53, March.
- Miles S. Kimball, 1990. "Precautionary Saving and the Marginal Propensity to Consume," NBER Working Papers 3403, National Bureau of Economic Research, Inc.
- Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
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