Abstract
We analyze the optimum consumption path of an individual who maximizes expected discounted utility over an infinite horizon, when savings earn a fixed return and uninsured wage earnings follows a two-state random process. It is shown that optimum consumption always changes discontinuously with the level of earnings. This discontinuity is bounded by the difference in earnings across states. For the case where the subjective discount rate is equal to the interest rate and the 'Hazard rate' nondecreases over time, it is shown that if wage earnings are expected to increase (decrease) then consumption strictly increases (decreases) over time.
| Original language | English |
|---|---|
| Pages (from-to) | 169-178 |
| Number of pages | 10 |
| Journal | Journal of Economic Theory |
| Volume | 49 |
| Issue number | 1 |
| DOIs | |
| State | Published - Oct 1989 |