Short-term planning and the life-cycle consumption puzzle

Frank Caliendo () and David Aadland ()

Microeconomics from EconWPA

Abstract: This paper provides a new explanation for the hump-shaped age- consumption profile observed in household data. Standard life-cycle models are based on an optimization problem that spans the entire life expectancy. Alternatively, we examine the consumption profile of an individual with a shorter planning horizon. The actual consumption profile is the envelope of a continuum of control problems because the agent’s short-term planning horizon continually slides along the time- scale, and the agent is therefore continually re-optimizing. We derive analytical solutions to a deterministic, continuous-time control model with this characteristic and we show that hump-shaped consumption is a feature of the model.

Keywords: Short-term planning; Hump-shaped consumption (search for similar items in EconPapers)
JEL-codes: D1 D2 D3 D4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mic
Date: 2004-04-07
Note: Type of Document - pdf; pages: 16
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http://129.3.20.41/eps/mic/papers/0404/0404003.pdf (application/pdf)

Related works:
Journal Article: Short-term planning and the life-cycle consumption puzzle (2007)
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