Adaptive Consumption Behavior

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.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Machine-readable bibliographic record - MARC, RIS, BibTeX