Life-Cycle Consumption: Can Single Agent Models Get it Right?

Bick, Alexander and Choi, Sekyu (2011): Life-Cycle Consumption: Can Single Agent Models Get it Right?

Abstract

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
• Language: English
• 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

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