Bick, Alexander and Choi, Sekyu (2011): Life-Cycle Consumption: Can Single Agent Models Get it Right?
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In the quantitative macro literature, single agent models are heavily used to explain "per-adult equivalent" household data. In this paper, we study differences between consumption predictions from a single agent model and "adult equivalent" consumption predictions from a model where household size evolves deterministically over the life-cycle and affects individual preferences for consumption. Using a theoretical model we prove that, under mild conditions, these predictions are different. In particular, the single household model cannot explain patterns in life-cycle consumption profiles (the so called 'humps'), nor cross sectional inequality in consumption originating from the second model, even after controlling for household size using equivalence scales. Through a quantitative exercise, we then document that differences in predictions can be substantial: total (per-adult equivalent) consumption over the life-cycle can be up to 5% different, depending on the specific parameterization. We find a similar number for total cross sectional inequality.
|Item Type:||MPRA Paper|
|Original Title:||Life-Cycle Consumption: Can Single Agent Models Get it Right?|
|Keywords:||Consumption, Life-Cycle Models, Households|
|Subjects:||J - Labor and Demographic Economics > J1 - Demographic Economics > J10 - General
D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21 - Consumption; Saving; Wealth
|Depositing User:||Alexander Bick|
|Date Deposited:||24. Feb 2011 18:24|
|Last Modified:||21. Feb 2013 18:57|
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