Optimal Consumption under Uncertainty, Liquidity Constraints, and Bounded Rationality

55 Pages Posted: 16 May 2012

See all articles by Ömer Özak

Ömer Özak

Southern Methodist University - Department of Economics; IZA

Multiple version iconThere are 2 versions of this paper

Date Written: May 15, 2012

Abstract

I study how boundedly rational agents can learn the solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. I present conditions for the existence of an optimal linear consumption rule and characterize it. Additionally, I use an empirically plausible theory of learning to generate a class of adaptive learning algorithms that converges to the optimal rule. This provides an adaptive and boundedly rational foundation for neoclassical consumption theory.

Keywords: Adaptive learning models, bounded rationality, dynamic programming, consumption function, behavioral economics, liquidity constraint, Markov process

JEL Classification: C6, D8, D9, E21

Suggested Citation

Özak, Ömer, Optimal Consumption under Uncertainty, Liquidity Constraints, and Bounded Rationality (May 15, 2012). Available at SSRN: https://ssrn.com/abstract=2060620 or http://dx.doi.org/10.2139/ssrn.2060620

Ömer Özak (Contact Author)

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

IZA

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