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Estimating Life-Cycle Parameters from Consumption Behavior at Retirement

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  • John Laitner
  • Dan Silverman

Abstract

Using pseudo-panel data, we estimate the structural parameters of a life--cycle consumption model with discrete labor supply choice. A focus of our analysis is the abrupt drop in consumption upon retirement for a typical household. The literature sometimes refers to the drop, which in the U.S. Consumer Expenditure Survey we estimate to be approximately 16%, as the "retirement--consumption puzzle." Although a downward step in consumption at retirement contradicts predictions from life--cycle models with additively separable consumption and leisure, or with continuous work-hour options, a consumption jump is consistent with a setup having nonseparable preferences over consumption and leisure and requiring discrete work choices. This paper specifies a life--cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at retirement to provide an advantageous method of identifying structural parameters --- most importantly, the intertemporal elasticity of substitution.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11163.

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Date of creation: Mar 2005
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Handle: RePEc:nbr:nberwo:11163

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