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Short-term planning and the life-cycle consumption puzzle

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  • Caliendo, Frank
  • Aadland, David

Abstract

This paper provides a new explanation for the hump-shaped age- consumption profile observed in household data. Standard life-cycle models are based on an optimization problem that spans the entire life expectancy. Alternatively, we examine the consumption profile of an individual with a shorter planning horizon. The actual consumption profile is the envelope of a continuum of control problems because the agent’s short-term planning horizon continually slides along the time- scale, and the agent is therefore continually re-optimizing. We derive analytical solutions to a deterministic, continuous-time control model with this characteristic and we show that hump-shaped consumption is a feature of the model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 4 (April)
Pages: 1392-1415

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:4:p:1392-1415

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References

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Citations

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Cited by:
  1. James Bullard & James Feigenbaum, 2006. "A leisurely reading of the life-cycle consumption data," Working Papers 2003-017, Federal Reserve Bank of St. Louis.
  2. Y. Hossein Farzin & Ronald Wendner, 2013. "Saving Rate Dynamics in the Neoclassical Growth Model — Hyperbolic Discounting and Observational Equivalence," Graz Economics Papers 2013-05, University of Graz, Department of Economics.
  3. Shantanu Bagchi, 2011. "Can overconfidence explain the consumption hump?," Journal of Economics and Finance, Springer, vol. 35(1), pages 41-70, January.
  4. Feigenbaum James A. & Li Geng, 2012. "Life Cycle Dynamics of Income Uncertainty and Consumption," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-49, May.
  5. Frank Caliendo & Kevin X.D. Huang, 2007. "Overconfidence and Consumption over the Life Cycle," Vanderbilt University Department of Economics Working Papers 0712, Vanderbilt University Department of Economics.
  6. David Aadland & Sherrill Shaffer, 2012. "Time Compression," CAMA Working Papers 2012-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer, vol. 16(4), pages 487-513, August.
  8. Feigenbaum, James, 2008. "Can mortality risk explain the consumption hump?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 844-872, September.
  9. Caliendo, Frank N. & Findley, T. Scott, 2013. "Time inconsistency and retirement planning," Economics Letters, Elsevier, vol. 121(1), pages 30-34.
  10. Kevin Huang & Frank Caliendo, 2011. "Rationalizing multiple consumption-saving puzzles in a unified framework," Frontiers of Economics in China, Springer, vol. 6(3), pages 359-388, September.
  11. T. Findley & Frank Caliendo, 2008. "The behavioral justification for public pensions: a survey," Journal of Economics and Finance, Springer, vol. 32(4), pages 409-425, October.

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