Working Paper: NBER ID: w16316
Authors: Jessica A. Wachter; Motohiro Yogo
Abstract: We develop a life-cycle consumption and portfolio choice model in which households have nonhomothetic utility over two types of goods, basic and luxury. We calibrate the model to match the cross-sectional and life-cycle variation in the basic expenditure share in the Consumer Expenditure Survey. The model explains the degree to which the portfolio share in risky assets rises in wealth in the cross-section of households in the Survey of Consumer Finances. For a given household, the portfolio share can fall in response to an increase in wealth, even though the model implies decreasing relative risk aversion.
Keywords: household portfolio; wealth; lifecycle consumption; nonhomothetic utility
JEL Codes: D11; D12; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher permanent income (J31) | higher portfolio shares (G11) |
| higher wealth (D31) | lower share of total consumption to basic goods (D12) |
| higher wealth (D31) | higher portfolio share (G11) |
| higher portfolio share (G11) | lower risk aversion (D81) |
| transitory wealth shocks (G59) | lower portfolio share (G11) |
| permanent income changes (D15) | higher portfolio share (G11) |
| portfolio share stability over lifecycle (G11) | nonhomothetic models (F12) |