By Salman Ahmed Shaikh
Abstract
It is empirically established that consumers by and large prefer consumption smoothening over their lifetimes. Consumption smoothening is achieved through optimal intertemporal consumption choices. The microeconomic foundation is based on optimal choice of consumption levels in each time period so that marginal utilities across different time periods are all equal. A related issue in intertemporal consumption is the tolerance for risk. It is also empirically established that consumers often are risk averse. In this paper, we discuss that intertemporal consumption is achievable with different levels of risk preferences. We also discuss the alternative for insurance in Islamic finance. Finally, we provide brief explanation of investment alternatives for intertemporal consumption. Our empirical data support that these instruments or asset classes for intertemporal consumption are effective means of earning enough asset income to achieve the consumption smoothening motive.
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