Working Paper: NBER ID: w11163
Authors: John Laitner; Dan Silverman
Abstract: Using pseudo-panel data, we estimate the structural \nparameters of a life--cycle consumption model with discrete labor \nsupply choice. A focus of our analysis is the abrupt drop in \nconsumption upon retirement for a typical household. The \nliterature sometimes refers to the drop, which in the U.S. \nConsumer Expenditure Survey we estimate to be approximately 16%, \nas the "retirement--consumption puzzle." Although a downward \nstep in consumption at retirement contradicts predictions from \nlife--cycle models with additively separable consumption and \nleisure, or with continuous work-hour options, a consumption jump \nis consistent with a setup having nonseparable preferences over \nconsumption and leisure and requiring discrete work choices. This \npaper specifies a life--cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at \nretirement to provide an advantageous method of identifying \nstructural parameters --- most importantly, the intertemporal \nelasticity of substitution.
Keywords: lifecycle consumption; retirement consumption puzzle; intertemporal elasticity of substitution
JEL Codes: E21; D11; D12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| retirement (J26) | drop in consumption (D12) |
| drop in consumption (D12) | estimation of IES (C51) |
| retirement (J26) | adjustment in consumption (E21) |
| household's taste for intertemporal smoothing (D15) | direction and magnitude of consumption change (E20) |
| anticipated increase in leisure (J29) | adjustment in consumption (E21) |