We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio choice model is capable of qualitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in stocks by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant “keeping-up with the Joneses” weighted average consumption playing the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say.
Download the paper in PDF format
Forthcoming in the Review of Economic Dynamics
Carolina Achury, Sylwia Hubar and Christos Koulovatianos
View all CFCM discussion papers | View all School of Economics featured discussion papers
Sir Clive Granger BuildingUniversity of NottinghamUniversity Park Nottingham, NG7 2RD
Enquiries: hilary.hughes@nottingham.ac.uk