Abstract
This paper presents a model for an explicitly-solved optimal consumption in which there is a lower marginal propensity to consume out of “human wealth” than out of financial wealth. I deliver this widely-noted consumption property (Friedman (1957) and Zeldes (1989)) by specifying that the conditional variance of income increases in its level. A larger realization of income not only implies a higher level of human wealth, but also signals a riskier stream of future labor income, inducing a higher propensity to save. A natural decomposition of saving is proposed to formulate Friedman’s insights on motives for holding wealth.
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