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Rational Consumers

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  • Kohei Kubota

    ()
    (Graduate School of Economics, Osaka University)

  • Mototsugu Fukushige

    ()
    (Graduate School of Economics, Osaka University)

Abstract

The life cycle/permanent income hypothesis (LCPIH) makes two postulates: people behave with rational expectations, and people do not have self-control problems. If either or both of these postulates do not apply, we cannot obtain a testable implication of the LCPIH. We use Japanese panel data that include responses to self-reported and retrospective questions to elicit individual characteristics such as forward-looking behavior, experience of self-control problems, and use of commitment devices to overcome self-control problems. First, we test the rational expectations hypothesis and find that it holds for the whole sample. We then test the LCPIH implication and find that consumption does not change in response to expected income changes, which we restrict to fit the assumptions of the LCPIH. This result indicates that the LCPIH is a convincing model to account for the behavior of rational consumers who have rational expectations and no self-control problems. Our results also imply that responses to self-reported and retrospective questions are not meaningless when eliciting information on household characteristics.

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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-15-Rev.

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Length: 63 pages
Date of creation: May 2009
Date of revision: Jun 2011
Handle: RePEc:osk:wpaper:0915r

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Keywords: Life cycle/permanent income hypothesis; Excess sensitivity; Rational expectation; Self-control problems; sophisticated and naive.;

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Cited by:
  1. HASHIMOTO Hideki & ICHIMURA Hidehiko & SHIMIZUTANI Satoshi, 2013. "Stability of Preference against Aging and Health Shocks: A comparison between Japan and the United States," Discussion papers 13068, Research Institute of Economy, Trade and Industry (RIETI).

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