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CRIEFF Discussion Paper Number 0710

A closed-form solution to the continuous-time consumption model with endogenous labor income

Aihua Zhang

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In this paper, we study an intertemporal maximization problem of an infinitely-lived individual who faces both labor income and asset return uncertainty. Given the growth rate of wage, the uncertainty of labor income is caused by the stochastic labor supply which is to be determined upon the available market information. Closed forms of consumption, labor supply and portfolio are obtained analytically by means of the martingale method. The Euler equation under uncertainty is established.

JEL codes: C61; C73; G1; J22

Keywords: Consumption, Labor Supply, Portfolio, Euler equation, Martingale