Concave Consumption Function under Borrowing Constraints

Richard M. H. Suen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the optimal consumption behavior of a consumer who faces uninsurable labor income risk and borrowing constraints. In particular, it provides conditions under which the decision rule for consumption is a concave function of existing assets. The current study presents two main findings. First, it is shown that the consumption function is concave if the period utility function is drawn from the HARA class and has either strictly positive or zero third derivative. Second, it is shown that the same result can be obtained for certain period utility functions that are not in the HARA class.

Keywords: Consumption function; borrowing constraints; precautionary saving (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-dge and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24927

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