Optimal Consumption Under Uncertainty, Liquidity Constraints, and Bounded Rationality

68 Pages Posted: 10 Oct 2013

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: October 9, 2013

Abstract

I study how boundedly rational agents can learn a "good" solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. Using an empirically plausible theory of learning I propose a class of adaptive learning algorithms that agents might use to choose a consumption rule. I show that the algorithm always has a globally asymptotically stable consumption rule, which is optimal. Additionally, I present extensions of the model to finite horizon settings, where agents have finite lives and life-cycle income patterns. This provides a simple and parsimonious model of consumption for large agent based models.

Keywords: Adaptive learning models, bounded rationality, dynamic programming, consumption function, behavioral economics, saving behavior

JEL Classification: C6, D8, D9, E21

Suggested Citation

Özak, Ömer, Optimal Consumption Under Uncertainty, Liquidity Constraints, and Bounded Rationality (October 9, 2013). Available at SSRN: https://ssrn.com/abstract=2338236 or http://dx.doi.org/10.2139/ssrn.2338236

Ömer Özak (Contact Author)

Southern Methodist University - Department of Economics ( email )

Dallas, TX 75275
United States
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HOME PAGE: http://omerozak.com

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