WEALTH CONSTRAINTS AND CONSUMER-BEHAVIOR

This paper develops a model of aggregate consumer behaviour in which some agents are assumed to behave rationally, spending out of the current value of discounted future income, while other agents are assumed to spend out of current and lagged income and wealth. The model is tested on UK data. It is found that a significant fraction of income accrues to households which own no property and spend all of their income immediately. These households could, in the context of a rational expectations model, be described as wealth constrained or spendthrift. The remaining households can be accommodated within a conventional rational expectations framework. Such households are found to discount their labour income and consumption at a rate which is higher than the average rate of return in the economy during the period considered. A model in which the rate of discount is constant is preferred to one in which it is sensitive to the expected rate of return. © 1990.