Life-Cycle Consumption: Can Single Agent Models Get it Right?

Alexander Bick and Sekyu Choi

MPRA Paper from University Library of Munich, Germany

Abstract: In the quantitative macro literature, single agent models are heavily used to explain "per-adult equivalent" household data. In this paper, we study differences between consumption predictions from a single agent model and "adult equivalent" consumption predictions from a model where household size evolves deterministically over the life-cycle and affects individual preferences for consumption. Using a theoretical model we prove that, under mild conditions, these predictions are different. In particular, the single household model cannot explain patterns in life-cycle consumption profiles (the so called 'humps'), nor cross sectional inequality in consumption originating from the second model, even after controlling for household size using equivalence scales. Through a quantitative exercise, we then document that differences in predictions can be substantial: total (per-adult equivalent) consumption over the life-cycle can be up to 5% different, depending on the specific parameterization. We find a similar number for total cross sectional inequality.

Keywords: Consumption; Life-Cycle Models; Households (search for similar items in EconPapers)
JEL-codes: D12 D91 E21 J10 (search for similar items in EconPapers)
Date: 2011-02
New Economics Papers: this item is included in nep-dge
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https://mpra.ub.uni-muenchen.de/29433/1/MPRA_paper_29433.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:29017

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