Ignorance, pervasive uncertainty, and household finance

• 成果类型: Article
• 署名作者: Luo, Yulei; Nie, Jun; Wang, Haijun
• 署名单位: University of Hong Kong; Federal Reserve System - USA; Federal Reserve Bank - Kansas City; Shanghai University of Finance & Economics; Shanghai University of Finance & Economics
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2021.105204
• 发表日期: 2022
• 关键词: Ignorance; Unknown income growth; Pervasive uncertainty; Strategic asset allocation

摘要

This paper studies how the two types of uncertainty due to ignorance, parameter and model uncertainty, jointly affect strategic consumption-portfolio rules, precautionary savings, and welfare. We incorporate these two types of uncertainty into a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth, and derive analytical solutions and testable implications. We show that the interaction between the two types of uncertainty plays a key role in determining the demand for precautionary savings and risky assets. We derive formulas to evaluate both marginal and total welfare costs of ignorance-induced uncertainty and show they are significant for plausible parameter values. (C) 2021 Elsevier Inc. All rights reserved.