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Adaptive Consumption Behavior

69 Pages Posted: 21 Oct 2009  

Peter Howitt

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Ömer Özak

Southern Methodist University - Department of Economics

Date Written: October 2009

Abstract

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

Howitt, Peter and Özak, Ömer, Adaptive Consumption Behavior (October 2009). NBER Working Paper No. w15427. Available at SSRN: https://ssrn.com/abstract=1492461

Peter Howitt (Contact Author)

Brown University - Department of Economics ( email )

Box B
Providence, RI 02912
United States
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Ömer Özak

Southern Methodist University - Department of Economics ( email )

Dallas, TX 75275
United States
+1-214-768-2755 (Phone)
+1-214-768-1821 (Fax)

HOME PAGE: http://omerozak.com

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