Working Paper: NBER ID: w7271
Authors: Pierre-Olivier Gourinchas; Jonathan A. Parker
Abstract: This paper employs a synthetic cohort technique 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. Using these profiles, we estimate a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty. The model fits the profiles quite well. In addition to providing tight 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. This change in behavior is mostly driven by the life-cycle profile of expected income. Our methodology provides a natural decomposition of saving into its precautionary and retirement components.
Keywords: No keywords provided
JEL Codes: C61; D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| age (J14) | buffer-stock saving behavior (D14) |
| age (J14) | certainty equivalent consumption pattern (D11) |
| buffer-stock saving behavior (D14) | liquidity and precautionary savings (E41) |
| certainty equivalent consumption pattern (D11) | accumulating liquid assets for retirement (D14) |
| age (J14) | saving behavior (D14) |
| age (J14) | consumption patterns (D10) |