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Consumption Patterns Over Pay Periods

  • Kelly, Clare

    (Department of Economics, University of Warwick,)

  • Gauthier Lanot

    (Department of Economics, 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 1.2 and 7) and the extent of measurement error in the data (which accounts for approximately 60% of the variance in the data).

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp656.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 656.

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Length: 42 pages
Date of creation: 2002
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Handle: RePEc:wrk:warwec:656
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