On the Fluctuations in Consumption and Market Returns in the Presence of Labor and Human Capital: An Equilibrium Analysis
Rodney L. White Center for Financial Research Working Paper Series #10-98
Posted: 6 May 1998
Date Written: 1998
We examine the effects of human capital on consumption, stock market, and other fluctuations in a general equilibrium continuous-time model. A representative consumer-worker-investor derives utility from consumption and leisure. A representative firm demands labor as the sole input to a stochastic production technology, driven by general (possibly non-multiplicative) shocks. For Cobb-Douglas utility and multiplicative shocks, labor is non-stochastic, and consumption and stock market volatility are equated, as under no human capital. Deviations from this are analyzed. For logarithmic utility and "constant elasticity of substitution" production technology, cases are identified where the presence of labor causes consumption to be smoother than the stock market.
JEL Classification: E21, G12
Suggested Citation: Suggested Citation