24 Pages Posted: 26 May 2011
Date Written: January 1, 2011
We investigate the joint consumption-saving and portfolio-selection problem under capital risk, assuming sophisticated but time-inconsistent agents. We introduce stochastic hyperbolic preferences as specified in Harris and Laibson (2008) and find closed-form solutions for the classic Merton (1969, 1971) optimal consumption and portfolio selection problem in continuous time. The portfolio rule remains identical to the time-consistent solution with power utility with no borrowing constraints. However, the marginal propensity to consume out of wealth is unambiguously greater than the time-consistent, exponential case.
Suggested Citation: Suggested Citation
Palacios-Huerta, Ignacio and Pérez-Kakabadse, Alonso, Consumption and Portfolio Rules with Stochastic Quasi-Hyperbolic Discounting (January 1, 2011). Available at SSRN: https://ssrn.com/abstract=1465110 or http://dx.doi.org/10.2139/ssrn.1465110