Adaptive Consumption Behavior

Peter Howitt () and Ömer Özak

No 15427, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper proposes and studies a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure, which, although sophisticated, places few informational or computational demands on the consumer. We show that under a variety of settings, our procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.

JEL-codes: E21 C63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-mac and nep-mic
Date: 2009-10
Note: EFG
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