Business Intelligence

Additive Habit Formation: Consumption In Incomplete Markets With Random Endowments

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Executive Summary

The authors provide a detailed characterization of the optimal consumption stream for the additive habit-forming utility maximization problem, in a framework of general discrete-time incomplete markets and random endowments. This characterization allows them to derive the monotonicity and concavity of the optimal consumption as a function of wealth, for several important classes of incomplete markets and preferences. These results yield a deeper understanding of the fine structure of the optimal consumption and provide a further theoretical support for the classical conjectures of Keynes.

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