Suen, Richard M. H. (2011): Concave consumption function and precautionary wealth accumulation.
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This paper examines the theoretical foundations of precautionary wealth accumulation in a multi-period model where consumers face uninsurable earnings risk and borrowing constraints. We begin by characterizing the consumption function of individual consumers. We show that consumption function is concave when the utility function has strictly positive third derivative and the inverse of absolute prudence is a concave function. These conditions encompass all HARA utility functions with strictly positive third derivative as special cases. We then show that when consumption function is concave, a mean-preserving spread in earnings risk would encourage wealth accumulation at both the individual and aggregate levels.
|Item Type:||MPRA Paper|
|Original Title:||Concave consumption function and precautionary wealth accumulation|
|Keywords:||Consumption function, borrowing constraints, precautionary saving|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21 - Consumption; Saving; Wealth
|Depositing User:||Richard M. H. Suen|
|Date Deposited:||18. Nov 2011 00:56|
|Last Modified:||13. Feb 2013 21:44|
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