Estimating Life-Cycle Parameters from Consumption Behavior at Retirement

John Laitner and Dan Silverman

No 11163, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using pseudo-panel data, we estimate the structural parameters of a life--cycle consumption model with discrete labor supply choice. A focus of our analysis is the abrupt drop in consumption upon retirement for a typical household. The literature sometimes refers to the drop, which in the U.S. Consumer Expenditure Survey we estimate to be approximately 16%, as the "retirement--consumption puzzle." Although a downward step in consumption at retirement contradicts predictions from life--cycle models with additively separable consumption and leisure, or with continuous work-hour options, a consumption jump is consistent with a setup having nonseparable preferences over consumption and leisure and requiring discrete work choices. This paper specifies a life--cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at retirement to provide an advantageous method of identifying structural parameters --- most importantly, the intertemporal elasticity of substitution.

JEL-codes: E21 D11 D12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mic
Date: 2005-03
Note: EFG
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Working Paper: Estimating Life—Cycle Parameters from Consumption Behavior at Retirement” (2005)
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