CARESS Working Paper # 95 - 09 Budget - constrained Search ¤

Abstract

A consumer with diminishing marginal utility in consumption, who can search for lower prices, will balance the gains from spreading consumption evenly through time against the bene ̄ts of delaying consumption until lower prices are revealed. Optimal programs of consumption, savings and price are characterized for a general formulation of this problem. Intertemporal substitutability is measured by relative-risk aversion. That relative-risk aversion that is small is su±cient for the intuitive solution: As the best current price rises, more search and less consumption is done. The general model is adapted to special cases. Among other things, this shows that linear utility and sequential search implies ex ante calculable reservation prices and consumption only when search stops. However, this characterization is a consequence of the restriction to linear utility. Outside of this context reservation prices and consumption may not be calculable, ex ante. ¤Je®rey Banks, Mitch Harwitz and Seamus Hogan are thanked for their helpful comments on this problem. Special thanks are due to Peter Morgan for his comments and encouragement. yPlease send all correspondence to Julian Manning, Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, USA, Phone: (215) 898 8486, Fax: (215) 573 2057, E-mail: Manning@econ.sas.upenn.edu

Cite this paper

@inproceedings{Manning2000CARESSWP, title={CARESS Working Paper # 95 - 09 Budget - constrained Search ¤}, author={Richard N. Manning and Julian Manningy}, year={2000} }