Asymptotic linearity of consumption functions and computational efficiency

Qingyin Ma and Alexis Akira Toda

Journal of Mathematical Economics, 2022, vol. 98, issue C

Abstract: We prove that the consumption functions in optimal savings problems are asymptotically linear if the marginal utility is regularly varying, or loosely speaking, behaves like a power function for wealthy agents. We also analytically characterize the asymptotic marginal propensities to consume (MPCs) out of wealth. Our results are useful for obtaining good initial guesses when numerically computing consumption functions, and provide a theoretical justification for linearly extrapolating consumption functions outside the grid.

Keywords: Computational efficiency; Optimal savings problem; Regular variation (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Working Paper: Asymptotic Linearity of Consumption Functions and Computational Efficiency (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:98:y:2022:i:c:s0304406821001257

DOI: 10.1016/j.jmateco.2021.102562

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