evasion and time consistency in the taxation of capital income evasion and time inconsistency have been prominent concerns in discussions of capital income taxation both theoretical and applied this paper establishes a link between them suggesting a potentially useful role for evasion additional to those previously identified by committing to relatively lax enforcement the government may be able to alleviate the welfare loss implied by its inability to commit to the tax rate the scope for this role proves strikingly wide it is optimal for the government to facilitate the evasion of the capital income taxes that it chooses to impose whenever the time consistent tax rate exceeds that which would be optimal if the government could commit to it copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

durable goods and product obsolescence the issue of product obsolescence is addressed by examining the optimal sales strategy of a monopolist firm that may introduce an improved version of its current product consumers expectations of a forthcoming product lowers the price that they are willing to pay for the current product because of its loss in value due to obsolescence the new product is characterized by consumers increased willingness to pay and by its competitive interaction with the old product these characteristics affect the tradeoff that the firm makes between the cost of waiting for new product sales versus the cost of cannibalizing these sales we analyze the effect of these characteristics of the new product on the firm s optimal sales strategy we consider the various policy measures available to the firm including limiting initial sales in order to lower cannibalization of the new product buying back the earlier version of the product in order to generate greater demand for the new product and announcements of future product introductions we find that for modest levels of product improvement the firm s optimal policy is to phase out sales of the old product while for large improvements a buy back policy is more profitable lastly we find that the firm is better off if it informs consumers whether a new product is forthcoming

remanufacturing as a marketing strategy the profitability of remanufacturing systems for different cost technology and logistics structures has been extensively investigated in the literature we provide an alternative and somewhat complementary approach that considers demand related issues such as the existence of green segments original equipment manufacturer competition and product life cycle effects the profitability of a remanufacturing system strongly depends on these issues as well as on their interactions for a monopolist we show that there exist thresholds on the remanufacturing cost savings the green segment size market growth rate and consumer valuations for the remanufactured products above which remanufacturing is profitable more important we show that under competition remanufacturing can become an effective marketing strategy which allows the manufacturer to defend its market share via price discrimination

trade ins and introductory offers in a monopoly we model the commonly used marketing practices of offering discounts to either repeat buyers trade ins or new buyers introductory offers of a quasi durable good we analyze these practices in terms of their potential for intertemporal and third degree price discrimination in our two period model the monopolist sets a first period price that segments the second period market optimally into holders and nonholders of the good in the second period different prices are quoted to the two market segments we present three versions of the model with varying assumptions on consumers rationality

foreign direct investment intra firm trade and ownership structure abstract asymmetric information about true opportunity cost in trade between a multinational and its foreign affiliate can alleviate the hold up problem in foreign direct investment selling shares in the affiliate to locals is also beneficial because it increases the parent multinational s information rent that is protected from a host government s confiscatory taxation

efficient black markets abstract this paper investigates analytically the welfare effects of black market activities that firms undertake to evade taxes the desirability of a black market is linked to the attributes of the goods supplied by black market firms the analysis identifies cases where a black market reduces increases the distortionary impact of taxation on the allocation of resources across the goods that the government is attempting to tax leading to a welfare gain loss

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

privacy and time consistent optimal labor income taxation abstract incomplete information is a commitment device for time consistency problems in the context of time consistent optimal labor income taxation privacy can lead to a pareto superior outcome and increases the effectiveness of public education as a second best policy

bundling of substitutes or complements abstract the adams yellen two good bundling framework is generalized to allow the goods to be substitutes or complements general theorems on price change effects are given a monopolist may find it most profitable to offer the goods only as a bundle even if they are imperfect substitutes or to not bundle the goods even if they are complements if one good is competitively sold a monopoly producer of the other good can never increase profits by offering his good only as part of a bundle however such a monopolist might profitably offer his good in both bundled and unbundled form to price discriminate even if the two goods are substitutes

panel discussion price stability how should long term monetary policy be determined these comments address the question of monetary strategy as distinct from monetary tactics they are not directed at the question of what monetary policy is appropriate at the present time or of how monetary policy should be determined at any specific point as a function of prevailing conditions instead the issue i take is one that has been of increasing interest to economists in recent years what should be the long terrn objectives of the monetary authority increased interest in this issue as opposed to the issue of fine tuning the economy reflects the general intellectual consensus that has emerged on two points first what the monetary authority surely can control in the long run is the growth rate of nominal income second issues of dynamic consistency and commitment are crucial to the design of appropriate monetary policies beyond its recognition of these points my view is that most of what the academic economics community has had to say on the issue of long run monetary strategy has been tangential at best and i fear that many of the papers at this conference have not done much to improve the situation i wish to advance four propositions about monetary policy and to discuss their implications first an optimal tax theory has little or nothing to do with sensible inflation policy second positive rates of inflation are almost certainly desirable third to an important extent institutions do the work of rules and monetary rules should be avoided instead institutions should be drafted to solve time inconsistency problems fourth h j res 409 the proposed zero inflation amendment is a good idea if it is not taken too seriously or too literally but is instead viewed as a device for strengthening the independence of the federal reserve system my first proposition is that the connection between optimal tax theory and infla

the fiscal multiplier and spillover in a global liquidity trap we consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap using an optimizing two country sticky price model we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics for the country with government expenditure the fiscal multiplier exceeds one the currency depreciates and the terms of trade worsen the fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies

the lower bound and the causes of monetary policy inertia evidence from sweden abstractin 2009 in the midst of a global recession sweden s riksbank approached a lower bound on nominal interest rates this encounter with the lower bound provides a natural experiment for investigating the causes of monetary policy inertia to exploit this experiment we estimate taylor rules with tobit specifications that permit both interest rate smoothing and persistent shocks serial correlation as explanations for inertia the interest rate smoothing hypothesis leads to a specification in which lagged actual values of the dependent variable appear on the right hand side of the taylor rule while the persistent shocks hypothesis leads to a specification in which lagged values of an unobserved latent dependent variable appear on the right hand side of the taylor rule the divergence of actual and latent dependent variables that occurs at the lower bound provides leverage in distinguishing the two hypotheses for a conventional taylor rule we find evidence of both sources of inertia for a modifi

sales and consumer lock in this paper examines the dynamically consistent price path for a new product monopolist unable to commit to future prices when consumers must incur setup costs of adopting the product the authors find that setup costs give rise to a price path with introductory sales along the path periods of high prices during which only locked in or captive customers buy the product alternate with sales low price periods during which new customers adopt the product as the stock of captive customers increases over time sales become less frequent after the customer base reaches some critical level no further sales take place they show that the monopolist may hold a sleeping patient in which initial sales of the product are postponed to avoid locking into a high pricing strategy that ignores new customers copyright 1989 by the london school of economics and political science

understanding the role of trade ins in durable goods markets theory and evidence the act of trading in a used car as partial payment for a new car resonates with practically all consumers such transactions are prevalent in many other durable goods markets ranging from golf clubs to ct scanners what roles do trade ins play in these markets what motivates the seller to set up a channel to facilitate trade ins intuitively accepting a trade in would appear to stimulate demand for the producer s product but facilitating the resale of these used goods that substitute for new goods might also increase cannibalization although such transactions involve billions of dollars we know relatively little about this practice from the extant research literature this paper develops an analytical model that incorporates key features of real world durable goods markets i coexistence of new and used goods markets ii consumer heterogeneity with respect to quality sensitivity iii firms that anticipate the cannibalization problem arising from the coexistence of new and used goods and iv lemon problems in resale markets whereby sellers of used goods are better informed than buyers about the quality of their particular item in our analysis a trade in policy amounts to an intervention by the firm in the used goods market which reduces inefficiencies arising from the lemon problem it motivates owners to purchase new goods and reduces their proclivity to hold on to purchased goods because of the low price the latter would fetch in a lemon market we also show that trade in programs are more valuable for less reliable products as well as for products that deteriorate more slowly our analysis shows that producers in durable goods markets should consider trade in programs as a matter of routine despite cannibalization concerns arising from a more active resale market a producer s profits will inevitably rise from introducing trade ins given pervasive lemon problems we test the key predictions of the model about price and volume of trade by assembling a data set of transactions of u s automobile consumers and find broad support for our model

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

robust monetary policy structural breaks and nonlinearities in the reaction function of the central bank of brazil abstract in this work we seek to investigate the existence of nonlinearities in the reaction function of the central bank of brazil arising from this policymaker s uncertainties about the effects of the output gap on inflation theoretically we follow tillmann 2011 to obtain a nonlinear optimal monetary policy rule that is robust to uncertainty about the output inflation trade off of the phillips curve in addition we perform structural break tests to assess possible changes in the conduct of the brazilian monetary policy during the inflation targeting regime the results indicate that i the uncertainties about the slope in the phillips curve implied nonlinearities in the central bank of brazil s reaction function ii we cannot reject the hypothesis of a structural break in the monetary rule parameters occurring in the third quarter of 2003 iii there was an increase in the response of the selic rate to output gap and a weaker response to the current inflation gap in meirelles tombini s administration and iv the central bank of brazil has also reacted to the exchange rate in meirelles tombini s administration

optimal monetary and fiscal policy with a zero bound on nominal interest rates i characterize optimal monetary and fiscal policy in a stochastic new keynesian model when nominal interest rates may occasionally hit the zero lower bound the benevolent policymaker controls the short term nominal interest rate and the level of government spending under discretionary policy accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound under commitment the gains associated with the use of the fiscal policy tool remain modest even though fiscal stabilization policy is part of the optimal policy mix

optimal monetary policy under commitment with a zero bound on nominal interest rates we determine optimal monetary policy under commitment in a forwardlooking new keynesian model when nominal interest rates are bounded below by zero the lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear a calibration to the u s economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached while the empirical magnitude of u s mark up shocks seems too small to entail zero nominal interest rates shocks affecting the natural real interest rate plausibly lead to a binding lower bound under optimal policy however this occurs quite infrequently and does not imply positive average inflation rates in equilibrium interestingly the presence of binding real rate shocks alters the policy response to non binding markup shocks

the commitment value of funding pensions abstract this paper studies how funding public pensions can improve policy outcomes when short sighted governments cannot commit we focus on sustainable plans where optimal nonlinear pensions are not reneged on by sequential governments funding pensions is a commitment mechanism it implies lower contributions than does the second best policy which reduces temptation to over redistribute later and to misuse revealed private information funding may be preferable even if the population growth rate is higher than the rate of return on assets second best optimal policies are also more likely to be renegotiation proof under fully funded pensions

can tax evasion tame leviathan governments this paper asks to what extent institutional features that facilitate tax evasion may keep leviathan governments at bay the specific feature we look at is banking secrecy abroad the analysis draws on a 16 generation olg model in which tax rates are determined in a repeated game between voters and a rent seeking leviathan government key insights are 1 effects on any generation alive when change takes place may differ substantially from steady state effects that accrue for generations yet to be born 2 there is considerable intergenerational diversity in these effects that is not monotonic as we move from young to old combined these results suggest that the political economy of pertinent institutional change may be quite complex

the effect of remanufacturing on procurement decisions for resellers in secondary markets the role of remanufacturing as a competitive tool for firms has been reflected in a number of studies to show that remanufacturing can reduce the unit cost of production by reusing components however the fact that remanufacturing can be used as a strategic tool for serving secondary markets as well has not been acknowledged in the literature in this paper we study the use of remanufacturing as a tool to serve secondary markets specifically we model the case of a reseller who procures used products based on an older generation of technology from an advanced market and then uses one of two options a she can either resell a small fraction of these used products in a developing market where the technology is acceptable or b she can invest in the remanufacturing of these products and then sell them in the developing market at a higher price the main result of the paper is that using remanufacturing to serve secondary markets reduces the number of units procured from the advanced market for the reseller in addition we show based on certain cost structures that the reseller is always better off if she uses remanufacturing to a certain extent

optimal strategies for trade old for remanufactured programs receptivity durability and subsidy due to its environmental financial and marketing benefits businesses and governments have increasingly embraced remanufacturing however the weak demand for remanufactured reman product severely hinders the implementation of remanufacturing lately trade old for remanufactured tor programs are growing in popularity as they can boost reman product demand in this paper we investigate the conditions when a firm should offer a tor program and how to best implement it our main findings are 1 firms should offer tor programs only when reman product receptivity and new product durability satisfy a certain condition 2 in addition to the reman product receptivity the new product durability also plays a significant role in motivating consumers to participate in tor programs and finally 3 high product remanufacturability and government subsidies are strong incentives for firms to offer their tor programs our analysis provides insights for firms and governments on how to use tor programs to benefit businesses consumers and the environment

managing new and differentiated remanufactured products we study a firm that makes new products in the first period and uses returned cores to make remanufactured products along with new products in future periods the remanufactured product is differentiated from the new product so the firm needs to choose differentiated prices we analyze the monopoly environment in two period multi period three four and five and infinite planning horizons and characterize the optimal remanufacturing and pricing strategy for the firm in the process we identify remanufacturing savings thresholds that determine the production and pricing strategy for the firm among other results we find counter to intuition that in a finite horizon multi period setting the optimal policy is not necessarily monotone in remanufacturing savings

the taylor principle and monetary policy approaching a zero bound on nominal rates quantile regression results for the united states and japan this paper offers a new approach that estimates the response of interest rates to inflation and the output gap at various points quantiles on the conditional distribution of interest rates this offers an improvement on empirical estimates conducted only at the mean and also allows us to test the propositions that policy shows greater aggression to inflation in the reaction function in terms of a greater response coefficient as interest rates reach low levels and increasing aggression as the lower bound is approached we find support for the taylor principle a more aggressive response to inflation than under a taylor rule but no detectable evidence of increasing aggression as the zero lower bound is approached in the us and japan

welfare effects of entry into markets with switching costs in many markets consumers have costs of switching between products that are functionally identical this note shows that entry of efficient low cost competitors into these markets may be socially detrimental in a linear model entry reduces social welfare as conventionally defined in more than half of the relevant parameter space in a more general model there is always a range of values of switching costs for which entry reduces welfare even if the entrant s production costs are lower than the incumbent s copyright 1988 by blackwell publishing ltd

the timing of sales this paper presents a model of intertemporal price discrimination a fixed number of sellers produce a homogeneous good consumers with different preferences enter the market in each period and leave when they make a purchase the sellers typically vary their prices over time charging a high price in most periods but occasionally cutting the price to sell to a large group of customers with a low reservation price in some equilibria all stores lower their price at the same time and to the same level

public economics and the theory of public policy when james mirrlees and william vickrey were awarded the nobel prize in economics last year it marked only the third time that the award had gone to scholars of public sector economics in contrast to the reception given to the previous two winners ronald coase and james buchanan the news was greeted with some bewilderment by policy specialists once removed from the academic literature who are mirrlees and vickrey and what have they done that has been of lasting benefit to the study of public economics let alone of practical benefit to policy makers this seems to me to be a fair question coase after all had set out a conceptual approach to the study of externalities and transaction costs that has become an implicit part of the methodological baggage carried around by policy economists and policy makers alike buchanan was in part responsible for the welcome emphasis on institutions in public sector decision making and for insisting that politicians bureaucrats and voters are human beings with human motives the legacy of mirrlees and vickrey is less well known but i would argue it is every bit as profound their approach to the theory of economic policy which is grounded on the importance of imperfect information as a constraint on public policy has changed the very nature of public economics research and of its implications for economic

balladurette and juppette a discrete analysis of scrapping subsidies this paper studies the effects of subsidies on durable goods markets in particular we focus on a recent policy in france in which the governments of balladur and juppe subsidized the replacement of old cars with new ones to study this policy we construct a dynamic stochastic discrete choice model of car ownership at the household level the resulting decision rules and equilibrium conditions are used to estimate the underlying parameters of the model using aggregate data these policy functions are used to evaluate the short and long run effects of the french policies we find that these policies do stimulate the automobile sector in the short run but through the induced changes in the cross sectional distribution of car ages create the basis for subsequent low activity further while these policies increase government revenues in the short run revenues in the long run are lower relative to a baseline without intervention

optimal monetary policy when interest rates are bounded at zero abstract this paper characterizes the optimal monetary policy reaction function in the presence of a zero lower bound on the nominal interest rate we analytically prove and numerically show that the function is highly non linear more expansionary and more aggressive than the taylor rule we then test its empirical validity taking the case of japan in the 1990s qualitatively we find some evidence of non linear monetary policy quantitatively we find the actual monetary policy to be too contractionary during the first half of the decade while the low interest policy during the latter half turns out to be fairly consistent with the simulated path

competitive advantage through take back of used products abstract motivated by a recent antitrust ruling against hill rom one of the two dominant american suppliers of hospital beds we develop a stylized model to investigate the consequences of used product take back on firms industry and customers our findings suggest that by taking back and reselling refurbished products a manufacturer can increase both profit margins and sales to the detriment of a non interfering competitor in our model customers are always better off under product take back but it depends on the degree of competition whether firms use the benefits of take back primarily to increase their margins or to pass them on to the customers by lowering their prices the first firm to offer take back in some cases can deter its competitors from following this profitable strategy especially if it has an existing advantage in terms of lower production cost or higher market share contrary to the claim of hill rom s competitor we find a legitimate business justification for hill rom s reduction of new product prices

choosing the right exchange old for new programs for durable goods with a rollover abstract by offering to trade in one unit of old product at a discounted price while selling new products exchange old for new eon programs have been considered efficient ways of expanding market for durable goods starting from the choice behavior of customers this paper studies optimal pricing and remanufacturing decisions for firms that adopt the eon program specifically considering a supply chain that consists of one manufacturer and one retailer we investigate two business models i in the manufacturer initiated scenario the manufacturer launches an eon program and owns all the old items that are returned he remanufactures all or a portion of the old items and sells them to a secondary market ii in the retailer initiated scenario any old items that are returned belong to the retailer she remanufactures the old items and sells them to the secondary market an in depth comparison between the optimal decisions in the two models is conducted in this paper we show it is possible that a firm may be even more profitable from being a free rider instead of offering an eon program by himself herself based on a centralized supply chain as a benchmark an exchange discount sharing contract is proposed to coordinate the supply chain and to improve the overall welfare of customers numerical experiments are conducted to show the profit impact for the supply chain members which uncover some interesting managerial insights for the proper adoption of the most efficient eon programs

durable good monopolies with rational expectations and replacement sales a monopoly producer of a durable good is examined under the previously uninvoked assumption that the good depreciates and hence that replacement sales must occur if a fixed stock of the good is to be maintained we find two ways in which the no depreciation result that the monopoly will always at least eventually produce a stock equal to that produced by a competitive market may not hold if the length of the trading period is nonzero the limiting stock produced by the firm will be lower than the competitive stock to ensure the profitability of future replacement sales if the firm is able to constrain its production capacity it may choose a constraint that always binds in the sense that it will be impossible for the firm to achieve a stock equal to the competitive stock

subgame perfect punishment for repeat offenders i introduction the literature on optimal law enforcement typically assumes that the government can commit to sanction schemes 1 this means the government can use any set of threats to penalize wrongdoers in particular if a crime occurs the government actually sanctions the wrongdoers even though ex post it may have no incentive to do so potential wrongdoers believe that the government will carry out the threat at any cost and therefore do not engage in the act in the first place in this article i give up the assumption that the government can commit to whatever sanction scheme i consider the analysis of optimal sanctions without the possibility to commit important because judges often have a lot of discretion as to the size of the penalty they may for example adjust sanctions to the financial possibilities age education and so on of the wrongdoer accordingly i allow only for sanctions that the government actually wishes to implement should a crime have occurred ruling out full commitment changes the optimal enforcement schemes suppose for example the government does not care about the sanction as is typically assumed in the literature then it will not enforce the penalty if a crime has happened given that there is say a small cost of doing so the rational criminal will anticipate the ex post enforcement behavior of the government therefore she will commit the crime because the threat of being sanctioned is not credible once one drops the commitment assumption the typical deterrence equilibria of the law enforcement literature between potential wrongdoers and the government are based on empty threats in the language of game theory the equilibria are not subgame perfect or time consistent i study the problem of subgame perfect sanctions using the framework of emons 2003 agents may commit a crime twice the act is inefficient the agents are thus to be deterred the agents are wealth constrained so that increasing the fine for the first offense means a reduction in the possible sanction for the second offense and vice versa the agents may follow history dependent strategies that is commit the crime a second time if and only if they were were not apprehended the first time the government seeks to minimize the probability of apprehension ignoring the government s commitment problem it is optimal to set the sanction for the first offense equal to the entire wealth of the agents while the sanction for the second offense equals zero the intuition is as follows a money penalty imposed for the second offense reduces the amount a person can pay for the first offense because the wealth available to pay penalties is assumed to be fixed over the two periods for that reason a higher probability event namely a first offense that is detected will be more effective use of the scarce money penalty resource than a lower probability event namely a second detected offense why is the probability of detection lower for the second rather than for the first crime simply because an agent faces the possibility of being sanctioned for the second crime if and only if he or she has already been sanctioned the first time for further results it is important to note that the optimal probability of apprehension increases with the benefit from the crimes this decreasing sanction scheme raises of course the issue of time consistency will the government really charge the agent the entire wealth when she was apprehended for the first crime knowing that then she will commit the second act for sure isn t it better for the government to renege and charge little for the first act so that the agent still has sufficient wealth to pay a sanction that deters the second crime given that the first act has been committed anyway that way the government can at least deter the second act to study this problem i consider a rent seeking government

managing new and remanufactured products we study a firm that makes new products in the first period and uses returned cores to offer remanufactured products along with new products in future periods we introduce the monopoly environment in two period and multiperiod scenarios to identify thresholds in remanufacturing operations next we focus our attention on the duopoly environment where an independent operator io may intercept cores of products made by the original equipment manufacturer oem to sell remanufactured products in future periods we characterize the production quantities associated with self selection and explore the effect of various parameters in the nash equilibrium among other results we find that if remanufacturing is very profitable the original equipment manufacturer may forgo some of the first period margin by lowering the price and selling additional units to increase the number of cores available for remanufacturing in future periods further as the threat of competition increases the oem is more likely to completely utilize all available cores offering the remanufactured products at a lower price

is leasing greener than selling based on the proposition that leasing is environmentally superior to selling some firms have adopted a leasing strategy and others promote their existing leasing programs as environmentally superior to green their image the argument is that because a leasing firm retains ownership of the off lease units it has an incentive to remarket them or invest in designing a more durable product resulting in a lower volume of new production and disposal however leasing might be environmentally inferior because of the direct control the firm has over the off lease products which may prompt the firm to remove them from the market to avoid cannibalizing the demand for new products motivated by these issues we adopt a life cycle environmental impact perspective and analytically investigate if leasing can be both more profitable and have a lower total environmental impact we find that leasing can be environmentally worse despite remarketing all off lease products and greener than selling despite the mid life removal of off lease products our analysis also provides insights for environmental groups and entities that use different approaches to improve the environmental performance of business practices we show that imposing disposal fees or encouraging remanufacturing under some conditions can actually lead to higher environmental impact we also identify when educating consumers to be more environmentally conscious can improve the relative environmental performance of leasing this paper was accepted by j miguel villas boas marketing

global liquidity trap abstract how should monetary policy respond to a global liquidity trap where the two countries may fall into a liquidity trap simultaneously using a two country new open economy macroeconomics model we first characterize optimal monetary policy and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap we next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules the interest rate rule targeting the producer price index performs well in this respect

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth