Credit Rationing and the Permanent Income Hypothesis

Abstract

We model endogenous credit rationing and its effects on aggregate consumption behavior. We explain two important empirical paradoxes of the consumption literature. First, it is possible that some configurations of income/consumption streams be such that an outside observer could estimate a marginal propensity to consume greater than one. Second, if one tried to estimate an intertemporal substitution model disregarding credit constraints, it might result in a nonconcave utility function, even when consumers' utility functions are concave.