Consumption habits and humps

Holger Kraft (), Claus Munk, Frank Thomas Seifried () and Sebastian Wagner ()
Additional contact information
Holger Kraft: Goethe University Frankfurt am Main
Frank Thomas Seifried: University of Trier
Sebastian Wagner: Goethe University Frankfurt am Main

Economic Theory, 2017, vol. 64, issue 2, No 4, 305-330

Abstract: Abstract We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence of habit formation, an impatient individual would prefer a decreasing consumption path over life. However, because of habit formation, a high initial consumption would lead to high required consumption in the future. To cover the future required consumption, wealth is set aside, but the necessary amount decreases with age which allows consumption to increase in the early part of life. At some age, the impatience outweighs the habit concerns so that consumption starts to decrease. We derive the optimal consumption strategy in closed form, deduce sufficient conditions for the presence of a consumption hump, and characterize the age at which the hump occurs. Numerical examples illustrate our findings. We show that our model can quantitatively reproduce the hump observed in US consumption data from the Consumer Expenditure Survey.

Keywords: Consumption hump; Life-cycle utility maximization; Habit formation; Impatience (search for similar items in EconPapers)
JEL-codes: D11 D14 D91 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://link.springer.com/10.1007/s00199-016-0984-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:64:y:2017:i:2:d:10.1007_s00199-016-0984-1

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-016-0984-1

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().