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.
We would like to thank participants at Brown University's theory and macroeconomics seminars, participants at the Econometric Society's LAMES 2008 and NASM 2009 meetings, and especially Kfir Eliaz, Glenn Loury, and David Weil for helpful comments and discussion. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Howitt, Peter & Ãzak, Ãmer, 2014. "Adaptive consumption behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 37-61. citation courtesy of