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Optimal Consumption Under Different Resolution Times of Uncertainty

Author

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  • Takashi Nishiwaki

    (Graduate School of Economics, Waseda University)

Abstract

This study compares the optimal consumption amount for a risk-averse agent under different uncertainty resolution times in a time-separable utility setting. We show that an agent with a positive third derivative utility function (i.e., a prudent agent) reduces his/her consumption amount when the uncertainty resolution is postponed. We also demonstrate that an agent does not change consumption behavior under different uncertainty resolution times if and only if the agent has a quadratic utility.

Suggested Citation

  • Takashi Nishiwaki, 2020. "Optimal Consumption Under Different Resolution Times of Uncertainty," Working Papers 2009, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2009
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    References listed on IDEAS

    as
    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    3. Menegatti, Mario, 2001. "On the Conditions for Precautionary Saving," Journal of Economic Theory, Elsevier, vol. 98(1), pages 189-193, May.
    4. Scott, Robert C & Horvath, Philip A, 1980. "On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, vol. 35(4), pages 915-919, September.
    5. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    6. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Background risk; Time-separable utility; Prudence; Optimal consumption; Timing of uncertainty resolution;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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