Concavity of the Consumption Function with Recursive Preferences

Semyon Malamud
Additional contact information
Semyon Malamud: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute

No 14-37, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Carroll and Kimball (1996) show that the consumption function for an agent with time-separable, isoelastic preferences is concave in the presence of income uncertainty. In this paper I show that concavity breaks down if we abandon time-separability. Namely, if an agent maximizing an isoelastic recursive utility has preferences for early resolution of uncertainty, there always exists a distribution of income risk such that consumption function is not concave in wealth. I also derive sufficient conditions guaranteeing that the consumption function is concave if the agent has preferences for late resolution of uncertainty.

Keywords: consumption; saving; marginal propensity to consume; recursive preferences; resolution of uncertainty (search for similar items in EconPapers)
JEL-codes: D14 D91 E21 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-05
New Economics Papers: this item is included in nep-mac, nep-mic and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=2440678 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1437

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().