Consumption Over the Life Cycle

Abstract

This paper estimates a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty. We employ synthetic cohort techniques and Consumer Expenditure Survey data to construct average age-profiles of consumption and income over the working lives of typical households across different education and occupation groups. The model fits the profiles quite well. In addition to providing reasonable estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life cycle. Young consumers behave as buffer-stock agents. Around age 40, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. Our methodology provides a natural decomposition of saving and wealth into its precautionary and life-cycle components.

Measuring Time Preferences

“…However, her analysis does not control for differences in income growth rates across demographic groups; when consumption tracks income (due to rule-ofthumb behavior or liquidity constraints), consumption growth may have little to do with time preferences. Gourinchas and Parker (2002) incorporate liquidity constraints and solve for a structural lifecycle savings model with age-dependent family dynamics and age-dependent (stochastic) income. This is a demographically enriched version of the buffer stock model pioneered by Deaton (1991Deaton ( , 1992 and Carroll (1992).…”

“…to financing constraints, such as liquidity constraints (e.g., Modigliani and Brumberg 1953;Hall 1978;Deaton 1991;Deaton 1992;Carroll 1992;Gourinchas and Parker 2002). The optimization model implies that the subject's financial flows at date t are only weakly linked to the subject's consumption at date t. If a household has ample liquid resources (or a line of credit), then an experimental windfall affects permanent income but has little impact on today's consumption.…”

Tax Regimes and Capital Gains Realizations

“…To address concerns that the reaction to the reform is simply a one-time effect, I estimate the effects without 1991. A simple life-cycle model of consumption and savings (see, for instance, Browning (1995), Carroll (1997), Gourinchas and Parker (2002), Gomes and Michaelides (2005) as well as Browning and Lusardi (1996) and Attanasio and Weber (2010) for literature overviews) integrates three different motives that have been empirically identified. First, younger individuals buffer stocks for precautionary reasons.…”

Age Cohort Effect on Financial Planning Preparation

“…Carroll's buffer stock model can provide a rationale for the income tracking of consumption that was highlighted by Carroll and Summers (1989). Attanasio and Weber (1989) and Gourinchas and Parker (2002) clarify the role played by age-related changes in demographics and hump-shape age profile of labour income in generating income tracking for relatively young consumers. Zeldes (1994 and show how precautionary motives interact with the insurance properties of social security in the US.…”