Intertemporal preference with loss aversion: Consumption and risk-attitude

Kyoung Jin Choi, Junkee Jeon and Hyeng Keun Koo

Journal of Economic Theory, 2022, vol. 200, issue C

Abstract: We study the consumption and portfolio selection problem of economic agents who face consumption irreversibility: there is disutility from changing consumption levels. The derived preference exhibits loss aversion toward a consumption gamble with the previous consumption level being the reference point. The optimization problem involves a non-monotonic and non-concave utility function. We derive a closed-form solution by combining a duality method and the super-contact principle. We show that the consumption policy involves an inaction interval for the consumption-permanent income ratio, which are consistent with various empirical regularities about consumption. The effective risk aversion derived from agents' optimal portfolio choice exhibits an inverted U-shape in the inaction interval.

Keywords: Consumption irreversibility; Intertemporal loss aversion; Excess sensitivity and smoothness; Asymmetric sensitivities; Consumption heterogeneity; U-shaped risky share (search for similar items in EconPapers)
JEL-codes: C61 D11 D15 E21 G11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053121001976
Full text for ScienceDirect subscribers only

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:eee:jetheo:v:200:y:2022:i:c:s0022053121001976

DOI: 10.1016/j.jet.2021.105380

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().