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Concave Consumption Function under Borrowing

Author

Listed:
  • Richard M. H. Suen

    (Department of Economics, University of California Riverside)

Abstract

This paper analyzes the optimal consumption behavior of a consumer who faces uninsurable labor income risk and borrowing constraints. In particular, it provides conditions under which the decision rule for consumption is a concave function of existing assets. The current study presents two main Öndings. First, it is shown that the consumption function is concave if the period utility function is drawn from the HARA class and has either strictly positive or zero third derivative. Second, it is shown that the same result can be obtained for certain period utility functions that are not in the HARA class.

Suggested Citation

  • Richard M. H. Suen, 2010. "Concave Consumption Function under Borrowing," Working Papers 201007, University of California at Riverside, Department of Economics, revised Aug 2010.
    • Handle: RePEc:ucr:wpaper:201007
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    File URL: https://economics.ucr.edu/repec/ucr/wpaper/10-07.pdf
    File Function: First version, 2010
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    More about this item

    Keywords

    Consumption function; borrowing constraints; precautionary saving;
    All these keywords.

    JEL classification:

    • 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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