Professor Friedman's Consumption Function and the Theory of Choice
Professor Friedman's Consumption Function and the Theory of Choice
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
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