Duality, Consumption Decisions under Uncertainty, and Liquidity Constraints: A Note
by
Vassilis A. Hajivassiliou and Yannis M. Ioannides
May 1992, Revised September 21, 1994
Abstract
A dual approach to the problem of maximizing lifetime utility subject to liquidity constraints in discrete time leads to a dual dynamic programming formulation which links commodity and asset demand theory under uncertainty with Frisch demand theory. We provide a full characterization of the dependence of the underlying Lagrange multiplier upon the fundamentals of the problem. We establish the existence of a threshold level of wealth, which characterizes constrained behavior. We explore the consequences of the dual approach for empirical work for both decisions of individuals and firms.
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