Lifecycle consumption under different income profiles: Evidence and theory

John Duffy and Yue Li

Journal of Economic Dynamics and Control, 2019, vol. 104, issue C, 74-94

Abstract: We report on a series of economic decision-making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles, representing different pension replacement rates. We aim to assess whether variations in pension replacement rates might aid or hinder individuals’ ability to make good lifecycle consumption and saving plans. We find that pension replacement rates matter for subjects’ experimental payoffs and consumption behavior. In particular, our treatment with a 100% pension replacement rate yields the highest experimental payoff, and more subjects in this treatment choose the status quo strategy of consuming endowments in every period. We show that a model of rational inattention is useful for explaining subjects’ responses to different pension replacement rates.

Keywords: Lifecycle model; Consumption and savings; Retirement planning; Public pensions; Behavioral and experimental economics; Rational inattention (search for similar items in EconPapers)
JEL-codes: C91 D14 D91 H55 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:104:y:2019:i:c:p:74-94

DOI: 10.1016/j.jedc.2019.05.006

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