Saving rates and portfolio choice with subsistence consumption

We analytically show that a common across rich/poor individuals Stone–Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in risky assets by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant “keeping-up-with-the-Joneses” weighted average consumption which plays the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say.

► The rich have higher saving rates, portfolio riskiness, and consumption volatility.
► Stone–Geary preferences with time-invariant subsistence explain these three facts.
► Time-variant catching-up-with-the-Joneses subsistence meets none of the above facts.
► Expectations drive the key mechanism, not elasticities of intertemporal substitution.
► Expected growth in future wealth allows the poor to exit survival concerns slowly.