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Consumption Patterns over Pay Periods

  • Clare Kelly

    (University of Warwick)

  • Gauthier Lanot

    (Keele University)

This paper establishes a theoretical framework to characterise the optimal behaviour of individuals who receive income periodically but make consumption decisions on a more frequent basis. The model incorporates price uncertainty and imperfect credit markets. The simulated numerical solution to this model shows that weekly consumption functions are ordered such that the functions within the payment period are highest in the first and the last week of the payment cycle for all wealth levels. Using weekly expenditure data from the FES we estimate the coefficient of relative risk aversion (point estimates are between 2 and 7) and the extent of measurement error in the data (which accounts for approximately 50\% of the variance in the data).

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File URL: http://128.118.178.162/eps/mic/papers/0211/0211013.pdf
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Paper provided by EconWPA in its series Microeconomics with number 0211013.

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Length: 48 pages
Date of creation: 05 Nov 2002
Date of revision:
Handle: RePEc:wpa:wuwpmi:0211013
Note: Type of Document - pdf; prepared on pc; pages: 48
Contact details of provider: Web page: http://128.118.178.162

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  1. Roy Bailey and Marcus Chambers, . "A Theory of Commodity Price Fluctuations," Economics Discussion Papers 432, University of Essex, Department of Economics.
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  12. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
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  21. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
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  25. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
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  29. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
  30. Sydney Ludvigson, 1996. "Consumption and credit: a model of time-varying liquidity constraints," Research Paper 9624, Federal Reserve Bank of New York.
  31. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
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