Life-cycle Consumption Research Articles

Deconstructing Life Cycle Expenditure

We revisit two well-known facts regarding life cycle expenditures: the “hump”-shaped profile of nondurable expenditures and the increase in cross-household consumption inequality. We document that the behavior of total nondurables masks surprising heterogeneity in the life cycle profile of individual consumption subcomponents. We provide evidence that the categories driving life cycle consumption either are inputs into market work or are amenable to home production. Using a quantitative model, we document that the disaggregated life cycle consumption profiles imply a level of uninsurable permanent income risk that is substantially lower than that implied by a model using a composite consumption good.

Lifecycle Portfolio Choice With Systematic Longevity Risk and Variable Investment—Linked Deferred Annuities

ABSTRACTThis article assesses the impact of variable investment‐linked deferred annuities (VILDAs) on lifecycle consumption and portfolio allocation, allowing for systematic longevity risk. Under a self‐insurance strategy, insurers set premiums to reduce the chance that benefits paid exceed provider reserves. Under a participating approach, the provider avoids taking systematic longevity risk by adjusting benefits in response to unanticipated mortality shocks. Young households with participating annuities average one‐third higher excess consumption, while 80‐year‐olds increase consumption about 75 percent. Many households would prefer to participate in systematic longevity risk unless insurers can hedge it at a very low price.

Timber and Chinese Architecture

Timber, a traditional construction material that was almost forgotten. Timber structure building got a qualitative leap in structure form, mechanized producing craftmanship and matching products, along with social progress and technology improvement. This paper will summarize modern timber structure forms by comparison with popular constructional material, like concrete and steel, in five aspects including life-cycle energy consumption, structure form, construction cost, construction period, seismic performance. Timber's advantages and disadvantages in architectural design will be listed, which may provide theoretical basis for diversified choice of construction materials in architectural design.

Health Shocks, Credit Scores, and Strategic Behavior with Credit Cards

The paper solves a puzzle related to unsecured credit and the use of credit scores. With credit scores increasingly present in credit decisions, and with the increased use of credit cards, especially in categories at risk of large negative health shocks, asymmetry of information between banks and individuals opens up wider possibilities for strategic behavior on the part of the latter. In this paper I analyze consumer strategic behavior in the credit market when faced with exogenous health shocks in the presence of banking institutions that rely on credit scores as a form of indicator of creditworthiness. By introducing multiple sources for asymmetry of information in the credit market, something not done in prior models, and introducing a dynamic discount factor, I find that the rational consumer engages in strategic behavior specific to their credit score. The paper solves an empirically parameterized model of life cycle consumption and borrowing focusing on unsecured credit and allowing for default in the presence of health shocks. It also allows for the simultaneous holding of both an interest bearing asset and unsecured debt. The findings support the hypothesis that exogenous credit shocks affect the behavior and the degree of strategy involved. While I do not possess actual consumer data on default, I develop some stylized empirical evidence in line with predictions of the theoretical model.

Exponential-Growth Bias and Lifecycle Consumption

Exponential-growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US-representative population and find substantial bias, with approximately one-third of subjects estimated as the fully-biased type. The magnitude of the bias is negatively associated with asset accumulation, and does not respond to a simple graphical intervention.

Are Indian Households Impurely Altruistic?

Households transfer substantial wealth between generations under various motives. Apart from life cycle consumption smoothing and old age security purposes, parents transfer wealth to children with motivations of altruism, exchange, for strategic or risk sharing. Theoretically, altruism predicts a one to one correspondence between parental income and child income. Under exchange, transfer is positively related to the services provided by the child. When strategic motive is operative, the ex ante transfer in motivated by the services provided by each children. This paper empirically examines the transfer motives in India using a 2006-07 primary data from 315 urban households. The decision on transfer is estimated by probit equation and the size of transfer is estimated by Tobit equation with parental and child characteristics. The estimated results show that the basic motivation for transfer is one of exchange. Indian households exchange wealth largely for the support and services provided by the children. JEL Classification: D10, D64, H31, J10 * Professor, Department of Econometrics, University of Madras, Chennai – 600 005. Email: tlsamy@unom.ac.in; tlsamy@yahoo.co.in; Telephone: 044-25399641.

Savings behavior with imperfect capital markets: When hyperbolic discounting leads to discontinuous strategies

This paper provides a detailed study of a simple life-cycle consumption model with quasi-hyperbolic discounting and an imperfect financial market. It gives a complete characterization of savings behavior. The joint assumptions of quasi-hyperbolic discount factors and no-borrowing constraints may lead to non-convexities in selves’ objective functions that may imply discontinuous equilibrium strategies. The savings function may undergo jumps and non-monotonicities when the income or the interest rate reaches a threshold value. These “anomalies” may exist even for reasonable parameter values.

Life Cycle Dynamics of Income Uncertainty and Consumption

We propose a method for estimating household income uncertainty that does not impose restrictions on the underlying income shocks or assumptions about household behaviors. We measure income uncertainty as the variance of linear projection errors at various future horizons, up to 25 years ahead, conditional on only the information available to households when the projection is made. Our uncertainty estimates change substantially over the life cycle. We calibrate an income process to match our estimates, allowing the variances of both transitory and persistent shocks to change over the life cycle. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile with a less pronounced hump.

A case study on the application of air- and water-cooled oil-free chillers to hospitals in Hong Kong

A comparison study on using air-cooled and water-cooled conventional and oil-free chillers in hospitals in Hong Kong is reported. The study commenced with a comprehensive literature review to reaffirm the effectiveness of recommended precaution measures for containing the risk of Legionnaires’ disease (LD) associated with using cooling towers. Numerical performance models for oil-free chillers established for use in the study are presented. Based on recorded cooling demands of two existing hospitals, the life-cycle energy consumption and cost of system options involving different combinations of heat rejection method and chiller type were evaluated, compared and discussed. The results show that water-cooled air-conditioning systems with conventional chillers and cooling towers are still more energy efficient than air-cooled systems with oil-free chillers. Water-cooled oil-free chillers may become an economically viable choice when their price is lowered in future. Pilot installation is recommendable, as it would allow the reliability and maintainability of the new oil-free chillers to be ascertained. Practical applications: Findings of the literature review reaffirmed the effectiveness of measures recommended in contemporary guidelines for LD prevention, which would ease the mind of owners, designers and operation and maintenance personnel in regard of using cooling towers in hospitals. The numerical models for oil-free chillers presented in the paper are useful for evaluation of the energy consumption of this new type of chiller and for comparison with other types of chillers. The study approach described in the paper, including the energy consumption prediction and life-cycle cost evaluation methods, provides a useful framework for similar studies.

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

Although the link between household size and consumption has strong empirical support, there is no consistent way in which demographics are dealt with in standard life-cycle models. We study the relationship between the predictions of the Single Agent model (the standard in the literature) versus a simple model extension (the Demographics model) where deterministic changes in household size and composition affect optimal consumption decisions. We show theoretically that the Demographics model is conceptually preferable to the Single Agent model as it captures economic mechanisms ignored by the latter. However, our quantitative analysis demonstrates that differences in predictions for consumption are negligible across models, when using standard calibration strategies. This suggests that it is largely irrelevant which model specification is used.

Economic Preparation for Retirement

The authors define and estimate measures of economic preparation for retirement based on a complete inventory of economic resources while taking into account the risk of living to advanced old age and the risk of high out-of-pocket spending for health care services. They ask whether, in a sample of 66–69 year-olds, observed economic resources could support with high probability a life-cycle consumption path anchored at the initial level of consumption until the end of life. They account for taxes, widowing, differential mortality and out-of-pocket health spending risk. They find that 71% of persons in their target age group are adequately prepared according to our definitions, but there is substantial variation by observable characteristics: 80% of married persons are adequately prepared compared with just 55% of single persons. They estimate that a reduction in Social Security benefits of 30 percent would reduce the fraction adequately prepared by 7.8 percentage points among married persons and by as much as 10.7 percentage points among single persons.

A Life-Cycle Consumption Model with Ambiguous Survival Beliefs

On average, young people underestimate whereas people overestimate their chances to survive into the future. We parameterize a learning model of subjective survival beliefs with psychological biases such that we replicate these patterns. We then combine this learning model with an otherwise standard life-cycle model of consumption and savings. In line with empirical findings we show that our agents consume more at younger ages and dissave less at old age than agents who perfectly foresee their survival probabilities. We also show that our information driven model yields similar predictions as a preference based hyperbolic discounting model.

Global growth, ageing, and inequality across and within generations

The world's leading economies, both developed and developing, are engaged in an ever-changing economic symbiosis that is governed in large part by demographics and technological change, but also by pension, healthcare, and other fiscal policies. This interconnected economic evolution—what economists call general equilibrium growth—holds important implications for inequality across and within generations. This paper presents such a general equilibrium model. It features six goods, five regions, three skill groups, and 91 overlapping generations, each making life-cycle consumption and labour-supply decisions. The model pays special attention to the evolution of the Chinese and Indian economies. Thanks to their rapid technological advance and vast populations, these nations will play an ever more dominant role in determining the world's supplies of capital and labour, particularly unskilled labour. The good news for the developed world is that China and India will supply it with major amounts of capital over time, thanks to their high saving rates. The bad news is that these economies are also likely to bring much more unskilled relative to skilled labour into the market, which will, over time, dramatically reduce the relative wages of unskilled workers in the US, Europe, and Japan. This relative increase in the world supply of unskilled workers reflects, in large part, the simple fact that China and India are gradually bringing each of their skill groups up to Western standards, but have relatively more unskilled labour in their work forces.

The Effects of Family Benefits on Childbearing Decisions: A Household Optimising Approach Applied to Australia*

This article analyses the effect of family benefits on childbearing decisions using an intertemporal utility maximising framework. The childbirth decisions of households are planned jointly with decisions about lifecycle consumption. The model is calibrated using data for Australia drawn, where possible, from the Household, Income and Labour Dynamics in Australia Wave 7 survey. The simulations show that changes in family benefits are likely to have both timing and quantum effects on childbirth but of a small magnitude, which tends to support findings using alternative empirical approaches. The simulations also indicate the effects of indirect family benefits, such as paid maternity leave and policies to reduce the time that mothers spend out of the labour force following child birth.

Global Growth, Aging and Inequality Across and within Generations

The world’s leading economies, both developed and developing, are engaged in an ever changing economic symbiosis that is governed in large part by demographics and technological change, but also by pension, healthcare, and other fiscal policies. This interconnected economic evolution - what economists call general equilibrium growth - holds important implications for inequality across and within generations. This paper presents such a general equilibrium model. It features six goods, five regions, three skill groups, and 100 overlapping generations each making life-cycle consumption and labor supply decisions. The model pays special attention to the evolution of the Chinese and Indian economies. Thanks to their rapid technological advance and vast populations, these nations will play an ever more dominant role in determining the world’s supplies of capital and labor, particularly unskilled labor. The good news for the developed world is that China and India will supply it with major amounts of capital over time thanks to their high saving rates. The bad news is that these economies are also likely to bring much more unskilled relative to skilled labor onto the market which will, over time, dramatically reduce the relative wages of unskilled workers in the U.S., Europe, and Japan. This relative increase in the world supply of unskilled workers reflects, in large part, simply the fact that China and India are gradually bringing each of their skill groups up to Western standards, but that they have relatively more unskilled labor in their work forces.

Why Do Household Portfolio Shares Rise in Wealth?

We develop a life-cycle consumption and portfolio choice model in which households have nonhomothetic utility over two types of goods, basic and luxury. We calibrate the model to match the cross-sectional and life-cycle variation in the basic expenditure share in the Consumer Expenditure Survey. The model explains the degree to which the portfolio share in risky assets rises in wealth in the cross-section of households in the Survey of Consumer Finances. For a given household, the portfolio share can fall in response to an increase in wealth, even though the model implies decreasing relative risk aversion. (JEL D11, D12, G11) Surveys of household finances reveal a striking fact: The share of wealth invested in stocks, or risky assets more generally, rises in wealth. While poorer households are less likely to participate in the stock market, this fact alone does not explain the positive relation between wealth and the share of wealth invested in stocks (hereafter, the portfolio share). The portfolio share rises in wealth even among stockholders. While more highly educated households tend to have higher portfolio shares, the portfolio share rises in wealth even among stockholders with the same education level. This article examines the role that nonhomothetic utility plays in explaining the observed relation between portfolio choice and wealth. We develop a life-cycle model in which the household consumes two types of goods. The household’s utility function has higher curvature over a “basic good” than over

The Baby Boom as it Ages: How Has it Affected Patterns of Consumption and Savings in the United States

Using detailed estimates of personal consumption expenditures at the state level for 1900, 1929, 1970, 1977, and 1982 developed by Stanley Lebergott, this paper demonstrates that the passage of the Baby Boom from childhood through the teen years and into family formation would have caused marked swings in patterns of aggregate consumption and savings in the United States during the past 50 years. The effect of age structure on personal consumption expenditures is estimated using population by single year of age from 0 to 85, revealing the expected pattern of life cycle consumption and savings in the adult years. In addition, however, a strong age-related pattern of consumption expenditures for children is demonstrated, with a strong savings component. The pattern, which emerges for children in all periods, is strongly U-shaped, with the highest levels of expenditure in the earliest years and for teens, and a marked pattern of saving when children are aged about 5 through 12.

Optimal irrational behavior in continuous time

Feigenbaum et al. (2009) showed in a two-period overlapping generations model that households can improve upon the rational, competitive equilibrium while maintaining competitive factor markets if agents coordinate upon an irrational consumption/saving rule. We generalize their findings to continuous time. The optimal consumption rule with coordination implies a U-shaped lifecycle consumption profile. Rational agents living in a standard competitive equilibrium would need a 4% increase of consumption in every period across the lifecycle to reach the level of utility that can be achieved under coordination. Most of this gain can be achieved with a linear saving rule.

Motives for Intergenerational Transfers: New Test for Exchange

I Introduction What is the for private transfers? Is it altruism where the donor gives because he/she cares about the welfare of the recipients (Becker 1974), or is it an motive, where the donor makes transfers in return for something (Bernheim, Shleifer, and Summers 1985), or is it both but one dominates another (Cox 1987)? This question of the for private transfers is not only an ideologically interesting one, but also one with important policy implications. Private transfers are related to many important economic issues. They greatly determine capital accumulation and savings (Kotlikoff and Summers 1981; Modigliani 1988); they provide a mechanism through which inequality can either be passed on to other generations or be mitigated (Tomes 1981); they can function as incomplete annuities, which help smooth life-cycle consumption and hedge against uncertainty (Kotlikoff and Spivak 1981, Morduch 1995). The for private transfers affects the effectiveness of public transfer programs, such as Social Security, food stamps, welfare programs, and childcare subsidy for low-income families. Different motives of private transfers lead to different effectiveness of public transfer programs (Barro 1974; Becker 1974; Cox 1987; Rosenzweig and Wolpin 1994). Under an altruistic assumption, public transfers can be neutralized by private transfers because when there is a change in public transfers and thus the welfare of the recipients, the donors will reduce their transfers accordingly. In contrast, under the assumption, the effects of public transfer programs cannot be easily offset by private transfers because a donor makes transfers in order to influence the actions of potential beneficiaries, and will not necessarily be affected by the change in public transfers. Tests have been proposed for the motives of transfers, but researchers did not reach a consensus (Bernheim et al. 1985; Wilhelm 1996; Cox and Rank 1992; Sloan, Picone, and Hoerger 1997). The problem is further complicated by the fact that researchers do not always distinguish between two types of private transfers: bequests and inter-vivos transfers. Some research has shown that when the transfers are made in the form of bequests, they are more likely to be divided equally, but when the transfers are in the form of inter-vivos transfers, they are more likely to be divided unequally (Menchik 1980; Tomes 1981; Wilhelm 1996; McGarry and Schoeni 1995, 1997; Norton and van Houtven 2006). Few studies have investigated the difference of the motives for these two types of transfers in the same study. One exception is the work by Norton and van Houtven (2006), who find that the elderly parent's decision to make inter-vivos transfers, but not bequests, is positively associated with time transfers from adult children, and conclude that plays a greater role in inter-vivos transfers but not in the way parents plan to leave bequests. Another limitation of the literature is that few works separate the donor's from the recipient's motive. In the exchange motive models, both the donor and the recipient have to have motives: the donor uses bequests to induce more attention and services from the recipient, and the recipient provides attention and services in for bequests in the future. This assumption is easily challenged theoretically, but the challenge is how to separate the of the donor from that of the recipient empirically. For instance, when we observe a positive correlation between a parent's money transfers and a child's time transfers, it is difficult to conclude whether the parent makes the transfers in for the child's time transfers or they are both altruistic in helping each other. With these challenges, we propose to examine how a child's time transfers are affected by his/her own expectations of receiving financial transfers. …

A Semiparametric Characterization of Income Uncertainty Over the Life Cycle

We propose a novel approach to estimate household income uncertainty at various future horizons and characterize how the estimated uncertainty evolves over the life cycle. We measure income uncertainty as the variance of linear forecast errors conditional on information available to households prior to observing the realized income. This approach is semiparametric because we impose essentially no restrictions on the statistical properties of the forecast errors. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile with a less pronounced hump.