Consumption and portfolio selection with labor income: A discrete-time approach

This paper studies the consumption and portfolio selection problem of an agent who is liquidity constrained and has uninsurable income risk in a discrete time setting. It gives properties of optimal policies and presents numerical solutions. The paper, in particular, shows that liquidity constraints and uninsurable income risk reduce consumption and investment in the risky asset substantially from the levels for the case where no market imperfections exist. This paper also shows how the agent evaluates his or her human capital and relates the evaluation to optimal decisions.