Adaptive Consumption Behavior

Peter Howitt, Ömer Özak

NBER Working Paper No. 15427
Issued in October 2009
NBER Program(s):   EFG

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.

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Acknowledgments

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