Bick, Alexander and Choi, Sekyu (2011): Life-Cycle Consumption: Can Single Agent Models Get it Right?
Download (405kB) | Preview
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 > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth
|Depositing User:||Alexander Bick|
|Date Deposited:||24. Feb 2011 18:24|
|Last Modified:||21. Feb 2013 18:57|
Aguiar, M. and Hurst, E. (2009). Deconstructing Lifecycle Expenditure, Working paper, University of Rochester and University of Chicago. Attanasio, O. P., Banks, J., Meghir, C. and Weber, G. (1999). Humps and Bumps in Lifetime Consumption, Journal of Business & Economic Statistics 17: 22–35. Blundell, R., Pistaferri, L. and Preston, I. (2008). Consumption Inequality and Partial Insurance, American Economic Review 98: 1887–1921. Fernández-Villaverde, J. and Krueger, D. (2007). Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data, Review of Economics and Statistics 89(3): 552–565. Fernández-Villaverde, J. and Krueger, D. (2010). Consumption and Saving over the Life Cycle: How Important are Consumer Durables?, Macroeconomic Dynamics Forthcoming. Fuchs-Schündeln, N. (2008). The response of household saving to the large shock of german reuni- fication, American Economic Review 98(5): 1798–1828. Gourinchas, P.-O. and Parker, J. A. (2002). Consumption over the life cycle, Econometrica 70: 47– 89. Gouveia, M. and Strauss, R. (1994). Effective federal individual income tax functions: An ex- ploratory empirical analysis, National Tax Journal 47(2): 317–339. Guvenen, F. and Smith, A. A. (2010). Inferring labor income risk from economic choices: An indirect inference approach, Working paper, University of Minnesota. Heathcote, J., Perri, F. and Violante, G. L. (2010). Unequal we stand: An empirical analysis of economic inequality in the united states, 1967-2006, Review of Economic Dynamics 13(1): 15 – 51. Special issue: Cross-Sectional Facts for Macroeconomists. Hong, J. H. and Rıos-Rull, J.-V. (2007). Social security, life insurance and annuities for families, Journal of Monetary Economics 54(1): 118 – 140. Carnegie-Rochester Conference Series on Public Policy: Economic Consequences of Demographic Change in a Global Economy April 21-22, 2006. Kaplan, G. and Violante, G. L. (2009). How Much Consumption Insurance Beyond Self-Insurance?, Working paper, University of Pennsylvania and New York University. Kopecky, K. and Suen, R. (2010). Finite state markov-chain approximations to highly persistent processes, Review of Economic Dynamics 13(3): 701–714. Krueger, D. and Perri, F. (2006). Does Income Inequality Lead to Consumption Inequality? Evi- dence and Theory., Review of Economic Studies 73(1): 163 – 193. Krueger, D., Perri, F., Pistaferri, L. and Violante, G. L. (2010). Cross-sectional facts for macroe- conomists, Review of Economic Dynamics 13(1): 1 – 14. Special issue: Cross-Sectional Facts for Macroeconomists. Lazear, E. P. and Michael, R. T. (1980). Family size and the distribution of real per capita income, The American Economic Review 70(1): pp. 91–107. Storesletten, K., Telmer, C. I. and Yaron, A. (2004). Consumption and risk sharing over the life cycle, Journal of Monetary Economics 51(3): pp. 609–633.
Available Versions of this Item
- Life-Cycle Consumption: Can Single Agent Models Get it Right? (deposited 24. Feb 2011 18:24) [Currently Displayed]