Consumption Over the Life Cycle

• Published in: Econometrica Vol. 70; no. 1; pp. 47 - 89
• Main Authors: Gourinchas, Pierre-Olivier, Parker, Jonathan A.
• Format: Journal Article
• Language: English
• Published: Oxford, UK and Boston, USA Blackwell Publishers Ltd 01-01-2002; Econometric Society; Blackwell; Blackwell Publishing Ltd
• Subjects: Age; Applied sciences; Approximation; Asset income; Behavioral research; Cash on hand; Computer simulation; Consumer economics; Consumption; Consumption patterns; Discount rates; Econometrics; Economic models; Estimates; Exact sciences and technology; Expenditure; Expenditures; Family size; Generalized method of moments; Household consumption; Household savings; Households; Income estimates; Life cycle; Life cycles; Mathematical models; Method of moments; Operational research and scientific management; Operational research. Management science; Optimization; Parameter estimation; Portfolio theory; precautionary saving; Retirement; Retirement income; Risk assessment; Savings; simulated method of moments; Statistical analysis; Stochastic models; Studies; Uncertainty; Variables; Wages; Wealth; Consumption; Stochastic model; Data analysis; Household; Decomposition method; Moment method; Optimization method; Income; Risk theory; Saving; Statistical estimation; Equilibrium; Mean estimation; Risk aversion; Life cycle; Consumer behavior; Risk rate; Model matching; Simulation; Method of simulated moment; Structural model; Econometrics; Dynamic model; Sample survey
• ISSN: 0012-9682; 1468-0262
• DOI: 10.1111/1468-0262.00269

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.