Chapter

Professor Friedman's Consumption Function and the Theory of Choice

W. M. Gorman

Edited by C. Blackorby and A. F. Shorrocks

in Separability and Aggregation

Published in print January 1996 | ISBN: 9780198285212
Published online November 2003 | e-ISBN: 9780191596322 | DOI: http://dx.doi.org/10.1093/0198285213.003.0006
 Professor Friedman's Consumption Function and the Theory of Choice

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Although this paper, which was published in Econometrica 32 (1964) can be read as a straightforward budgeting argument, it was inspired by a claim of Sargan's about the necessary and sufficient conditions for Friedman's permanent income hypothesis to be valid. A version of this hypothesis shows that a 10% increase in permanent income leads to a 10% increase in expenditure in every period. Sargan (1957) claimed that this would lead to a 10% increase in expenditure on every commodity. Section 2 of the paper disposes of the Sargan claim by means of a counter‐example, and Sect. 3 presents the restrictions on the cost function that are both necessary and sufficient for Friedman's permanent income hypothesis to hold. The remaining sections apply the solution derived and its special cases to problems of decentralized decision‐making suggested by Strotz and Samuelson, and to a problem discussed by Drèze.

Keywords: budgeting; choice; cost functions; decision‐making; expenditure; Friedman's consumption function; Friedman's permanent income hypothesis; permanent income

Chapter.  5081 words. 

Subjects: Microeconomics

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