On the Concavity of the Consumption Function

Posted: 10 Oct 1998

See all articles by Christopher D. Carroll

Christopher D. Carroll

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

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Abstract

Zeldes (1989), Carroll (1992,1993), and others have shown that optimal consumption behavior for consumers facing income uncertainty can be remarkably different from the certainty-equivalent case. Carroll (1992) observes that many of the differences can be attributed to the concavity of the consumption function under uncertainty, but he does not describe the conditions under which the consumption function will be concave. We show that if labor income is stochastic, the consumption function will be concave for many commonly used utility functions, and if both labor income and capital income are stochastic, the consumption function is concave for an even broader group of utility functions.

JEL Classification: C6, D91, E21

Suggested Citation

Carroll, Christopher D. and Kimball, Miles S., On the Concavity of the Consumption Function. FEDS Paper Number 95-10. Available at SSRN: https://ssrn.com/abstract=6441

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics ( email )

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University of Colorado Boulder ( email )

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HOME PAGE: http://www.colorado.edu/Economics/people/faculty/kimball.html

Center for Economic and Social Research, USC ( email )

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National Bureau of Economic Research (NBER)

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