arbiter
JournalsAccount

Income disaster model with optimal consumption

Seyoung Park

Economic Theory2025https://doi.org/10.1007/s00199-024-01629-xarticle
AJG 3ABDC A*
Weight
0.44

Abstract

We propose a continuous-time income disaster model with optimal consumption. We endogenously determine the stochastic discount factor (SDF) in an incomplete market caused by income disaster. We then derive optimal consumption decisions for two types of agents, one who is exposed to income disaster and another who is not. We find a large incomplete-markets precautionary savings term between the two agents, which pushes the interest rate down and helps to resolve the risk-free rate puzzle. Interestingly, with income disaster the equilibrium interest rate is a decreasing function of risk aversion while the equity premium is an increasing function. Finally, our model can better match empirical marginal propensities to consume numbers and explain the low-consumption-high-savings puzzle.

3 citations

Open via your library →

Cite this paper

https://doi.org/https://doi.org/10.1007/s00199-024-01629-x

Or copy a formatted citation

@article{seyoung2025,
  title        = {{Income disaster model with optimal consumption}},
  author       = {Seyoung Park},
  journal      = {Economic Theory},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1007/s00199-024-01629-x},
}

Paste directly into BibTeX, Zotero, or your reference manager.

Flag this paper

Income disaster model with optimal consumption

Flags are reviewed by the Arbiter methodology team within 5 business days.

Evidence weight

0.44

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.32 × 0.4 = 0.13
M · momentum0.57 × 0.15 = 0.09
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.