The structure of optimal consumption streams in general incomplete markets |
| |
Authors: | Semyon Malamud Eugene Trubowitz |
| |
Institution: | 1. ETHZ, D-MATH, R?mistrasse 101, 8092, Zurich, Switzerland
|
| |
Abstract: | We prove that for any incomplete market and any concave utility function the marginal propensities to consume and to save are always positive.
Furthermore, we introduce a class of incomplete markets that includes almost all well known examples of market incompleteness
in finance and macroeconomics. Two concrete examples are idiosyncratic income shocks and general, diffusion driven incompleteness.
For all markets in our class we explicitly solve the associated utility maximization problem by a recursive construction and derive many important properties. For example, precautionary savings and the diminishing marginal propensity to consume.
Effectively, the class is characterized by these two economic properties. We also prove that the growth rate of consumption
is always larger when markets are incomplete and that precautionary savings are monotone increasing in the size of idiosyncratic
risk. Our construction can be implemented computationally by an efficient, robust numerical scheme.
We thank two anonymous referees for useful comments and remarks. |
| |
Keywords: | Optimal consumption stream Incomplete markets Idiosyncratic risk Convexity Marginal propensity to consume |
本文献已被 SpringerLink 等数据库收录! |
|