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Optimal Consumption under Uncertainties: Random Horizon Stochastic Dynamic Roy’s Identity and Slutsky Equation

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DOI: 10.4236/am.2014.52028    3,517 Downloads   4,735 Views
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ABSTRACT

This paper extends Slutsky’s classic work on consumer theory to a random horizon stochastic dynamic framework in which the consumer has an inter-temporal planning horizon with uncertainties in future incomes and life span. Utility maximization leading to a set of ordinary wealth-dependent demand functions is performed. A dual problem is set up to derive the wealth compensated demand functions. This represents the first time that wealth-dependent ordinary demand functions and wealth compensated demand functions are obtained under these uncertainties. The corresponding Roy’s identity relationships and a set of random horizon stochastic dynamic Slutsky equations are then derived. The extension incorporates realistic characteristics in consumer theory and advances the conventional microeconomic study on consumption to a more realistic optimal control framework.

Cite this paper

D. Yeung, "Optimal Consumption under Uncertainties: Random Horizon Stochastic Dynamic Roy’s Identity and Slutsky Equation," Applied Mathematics, Vol. 5 No. 2, 2014, pp. 263-284. doi: 10.4236/am.2014.52028.

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