69 Pages Posted: 21 Oct 2009
Date Written: October 2009
This paper proposes and studies a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure, which, although sophisticated, places few informational or computational demands on the consumer. We show that under a variety of settings, our procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.
Suggested Citation: Suggested Citation
Howitt, Peter and Özak, Ömer, Adaptive Consumption Behavior (October 2009). NBER Working Paper No. w15427. Available at SSRN: https://ssrn.com/abstract=1492461