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The Markov Consumption Problem

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  • Michael Sattinger

Abstract

This paper develops a model of safety first consumption behavior in which the likelihood of survival to the next period depends on current consumption levels. Below a threshold asset level, individuals follow a decumulation path, and above that level they follow an accumulation path. Saving rates then vary discontinuously with asset level, generating a poverty trap and divergence in incomes. Reduction of risk raises saving rates. A more equitable distribution of assets can be consistent with greater aggregate savings and growth because of declining marginal propensity to save over some asset intervals.

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  • Michael Sattinger, 2010. "The Markov Consumption Problem," Discussion Papers 10-03, University at Albany, SUNY, Department of Economics.
    • Handle: RePEc:nya:albaec:10-03
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