Concave consumption function and precautionary wealth accumulation

Richard M. H. Suen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the theoretical foundations of precautionary wealth accumulation in a multi-period model where consumers face uninsurable earnings risk and borrowing constraints. We begin by characterizing the consumption function of individual consumers. We show that consumption function is concave when the utility function has strictly positive third derivative and the inverse of absolute prudence is a concave function. These conditions encompass all HARA utility functions with strictly positive third derivative as special cases. We then show that when consumption function is concave, a mean-preserving spread in earnings risk would encourage wealth accumulation at both the individual and aggregate levels.

Keywords: Consumption function; borrowing constraints; precautionary saving (search for similar items in EconPapers)
JEL-codes: D81 D91 E21 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-dge and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/34774/1/MPRA_paper_34774.pdf original version (application/pdf)

Related works:
Working Paper: Concave Consumption Function and Precautionary Wealth Accumulation (2011)
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:pra:mprapa:34774

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().