Lifecycle consumption plans, social learning and external habits: Experimental evidence

Enrica Carbone () and John Duffy

Journal of Economic Behavior & Organization, 2014, vol. 106, issue C, 413-427

Abstract: We report results from a laboratory experiment exploring the extent to which individuals can solve a deterministic, intertemporal lifecycle consumption optimization problem and the effect of revealing social information on past average consumption amounts; as all individuals have identical induced preferences and lifetime incomes, such social information could be useful in solving for the optimal consumption path. Instead, we find that the provision of social information on past average levels of consumption results in a greater deviation of consumption from both the unconditional and the conditionally optimal paths. We find some improvement in consumption planning relative to the conditional optimum when social concerns (external habits) are explicitly incorporated into subject's period utility functions as in external habit formation preference specifications. Our results on the effects of social information on consumption behavior may help to explain the phenomenon of over-consumption and under-saving that has been observed in many developed countries in recent decades as social information on the behavior of others has become more readily available.

Keywords: Consumption; Intertemporal optimization; Social learning; Lifecycle models; External habit formation; Experimental economics (search for similar items in EconPapers)
JEL-codes: C91 C92 D11 D91 E21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:106:y:2014:i:c:p:413-427

DOI: 10.1016/j.jebo.2014.07.010

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