Abstract
In this paper we extend the consumption–investment life cycle model for an uncertain-lived agent, proposed by Richard (1974), to allow for flexible labour supply. We further study the consumption, labour supply and portfolio decisions of an agent facing age-dependent mortality risk, as presented by UK actuarial life tables spanning the time period from 1951–2060 (including mortality forecasts). We find that historical changes in mortality produce significant changes in portfolio investment (more risk taking), labour (decrease of hours) and consumption level (shift to higher level) contributing up to 5% to GDP growth during the period from 1980 until 2010.
Highlights
Lifetime consumption and investment models for infinitely lived agents have been considered by various authors, including Merton (1969 and 1971), Bodie, Merton and Samuelson (1992) as well as Bodie et al (2004)
In this paper we extend the consumption-investment life cycle model for an uncertain-lived agent, proposed by Richard (1974), to allow for flexible labor supply
We find that historical changes in mortality produces significant changes in portfolio investment, labour and consumption level contributing up to 5% to GDP growth during the period from 1980 until 2010
Summary
Lifetime consumption and investment models for infinitely lived agents have been considered by various authors, including Merton (1969 and 1971), Bodie, Merton and Samuelson (1992) as well as Bodie et al (2004). In the empirical part of the paper we have used actual and forecasted mortality curves as obtained from statistical life tables supplied by the UK’s Office for National Statistics covering the years from 1951 until 2060 Substituting these curves into our model we observe that keeping all other parameters constant, changes in the mortality curves from 1980 to 2010 lead to a shift in consumption upwards of roughly 5%, contributing to a total of approximately 100% in real GDP growth in the UK from 1980 to 2010.3 We observe that optimal labour supply in effect of the same changes of the mortality curves is reduced by 4%, from about 40.2 hours to 38.7 hours per week from 1980 to 2010.
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