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Concavity of the Consumption Function with Recursive Preferences

Author

Listed:
  • Semyon MALAMUD

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

Abstract

Carroll and Kimball (1996) show that the consumption function for an agent with time-separable, isoelastic preferences is concave in the presence of income uncertainty. In this paper I show that concavity breaks down if we abandon time-separability. Namely, if an agent maximizing an isoelastic recursive utility has preferences for early resolution of uncertainty, there always exists a distribution of income risk such that consumption function is not concave in wealth. I also derive sufficient conditions guaranteeing that the consumption function is concave if the agent has preferences for late resolution of uncertainty.

Suggested Citation

  • Semyon MALAMUD, 2014. "Concavity of the Consumption Function with Recursive Preferences," Swiss Finance Institute Research Paper Series 14-37, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1437
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    More about this item

    Keywords

    consumption; saving; marginal propensity to consume; recursive preferences; resolution of uncertainty;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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