We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence ...

We establish a convergence theorem that shows that discrete-time recursive utility, as developed by Kreps and Porteus (1978), converges to stochastic differential utility, as introduced by Duffie and Epstein (1992), in the ...

This paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy long-term ...

We study continuous-time optimal consumption and investment with Epstein-Zin recursive preferences in incomplete markets. We develop a novel approach that rigorously constructs the solution of the associated Hamilton-Jac ...

The observed hump-shaped life-cycle pattern in individuals’ consumption cannot be explained by the classical consumption-savings model. The consensus explanation is that the hump is caused by constraints and unspanned ...

We solve a rich life-cycle model of household decisions involving consumption of perishable goods and housing services, habit formation for housing consumption, stochastic labor income, stochastic house prices, home renting ...

In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we evaluate the welfare effects of predictability on life-cycle consumption-portfolio choice. We compare skilled investors ...