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Revisiting the effect of household size on consumption over the life-cycle

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  • Bick, Alexander
  • Choi, Sekyu

Abstract

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.

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Bibliographic Info

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

Volume (Year): 37 (2013)
Issue (Month): 12 ()
Pages: 2998-3011

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2998-3011

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Consumption; Life-cycle models;

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Cited by:
  1. Jurgen Faik & Uwe Fachinger, 2013. "The decomposition of well-being categories: An application to Germany," Working Papers 307, ECINEQ, Society for the Study of Economic Inequality.

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