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Consumption Habits and Humps
(2015-07-10)
We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence ...
Stochastic Differential Utility as the Continuous-Time Limit of Recursive Utility
(2013-05-10)
We establish a convergence theorem that shows that discrete-time recursive utility, as developed by Kreps and Porteus (1978), converges to stochastic differential utility, as introduced by Duffie and Epstein (1992), in the ...
Consumption and Wage Humps in a Life-Cycle Model with Education
(2015-02-24)
The observed hump-shaped life-cycle pattern in individuals’ consumption cannot be explained by the classical consumption-savings model. The consensus explanation is that the hump is caused by constraints and unspanned ...