JOURNAL OF ECONOMIC THEORY 5, 308-335 (1972) Consumption Decisions under Uncertainty* JACQUES H. DRUZE Center for Operations Research and Econometrics, UniversitP Catholique de Louvain, Louvain, Belgium AND FRANCO MODIGLIANI Massuchussets Institute of Technology, Cambridge, Massachusetts 02139 Received May 15, 1970 This paper deals with three issues related to consumption decisions under uncertainty, namely, (i) the determinants of risk aversion for future consumption; (ii) the impact of uncertainty about future resources on current consumption and (iii) the separability of consumption decisions and portfolio choices. These issues are discussed in the context of a simple model introduced, together with our assumptions, in Section 1. The first issue is motivated and treated in Section 2, the conclusions of which are summarized in Proposition 2.5. The other two issues are treated in Sec- tion 3 under the assumption that there exist perfect markets for risks, and in Section 4 under the converse assumption. Some technical results needed in the text are collected in Appendices A, B and C; a simple graphical illustration of our major result, Theorem 3.3, is given in Appendix D.l *The research underlying this paper was initiated while the authors were both affiliated with the Graduate School of Industrial Administration, Carnegie-Mellon University; the support of that institution, and at a later stage of the Sloan School of Management, Massachussets Institute of Technology, is gratefully acknowledged. The authors also wish to thank Albert Ando and Ralph Beals for their helpful assistance at an early stage of this work, as well as Louis Gevers, Agnar Sandmo and Joseph Stiglitz for their critical reading of the final manuscript. 1 An earlier summary version of this paper, written in French, has appeared in the Cahiers du Sekinaire d’Economitrie [5]. 308 Copyright 0 1972 by Academic Press, Inc. All rights of reproduction in any form reserved.