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- Title
ON THE CONCAVITY OF THE CONSUMPTION FUNCTION.
- Authors
Carroll, Christopher D.; Kimball, Miles S.
- Abstract
The paper discusses the concavity of the consumption function. It is known in macroeconomic theory that solutions to the optimal intertemporal consumption can change when income uncertainty is introduced into the problem. Introducing labor income uncertainty makes the consumption function concave using numerical methods. The idea of function concavity dates back to the origin of Keynesian macroeconomics. The standard versions of intertemporal optimizing models imply a marginal propensity to consume that is related to the level of household wealth. It is shown that adding income uncertainty to the standard optimization problem induces a concave consumption function.
- Subjects
CONSUMPTION (Economics); CONCAVE functions; MACROECONOMICS; UNCERTAINTY (Information theory); INCOME; KEYNESIAN economics
- Publication
Econometrica, 1996, Vol 64, Issue 4, p981
- ISSN
0012-9682
- Publication type
Article
- DOI
10.2307/2171853