On the specification of risk aversion in an expenditure equation

Summary

The article starts with an attempt at deriving the consequences of introducing uncertainty in a very simple one-period investment model. Within the framework of this model it justifies the well-known procedure of Duesenberry of (subjectively) increasing the marginal cost of funds.

The results of this simple model are used as a starting point for the more general problem of uncertain receipts, available funds and planned expenditure,i.e., expenditure planned without taking into account the uncertainty receipts. In general, there is a gap between available funds and planned expenditure. It is argued that the fraction of the gap which is bridged depends on the size of the gap relative to the available funds. The final part of the article tries to apply these ideas to the specification of a macro-consumption function.