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Life-cycle consumption: can single agent models get it right?

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  • Bick, Alexander
  • Choi, Sekyu
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    Abstract

    In the quantitative macroeconomics literature, single agent models are widely used to explain ``per-adult equivalent'' data, which are obtained at the household level. In this paper we suggest a simple framework to understand the sources of bias when these models are used to make predictions for aggregate consumption. In both a theoretical and a quantitative exercise, we find that economies of scale in consumption inside the household are positively related to the bias introduced by the single agent approach in predicted consumption profiles over the life-cycle. We also do an external validation exercise, which suggests that economies of scale inside the household are rather large, pointing out the need to approach life-cycle consumption with models that consider households rather than single agents.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30910.

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    Date of creation: Feb 2011
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    Handle: RePEc:pra:mprapa:30910

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    Keywords: Consumption; Life-Cycle Models; Households;

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    1. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers, Georgetown University, Department of Economics gueconwpa~03-03-19, Georgetown University, Department of Economics.
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    12. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
    13. Lazear, Edward P & Michael, Robert T, 1980. "Family Size and the Distribution of Real Per Capita Income," American Economic Review, American Economic Association, American Economic Association, vol. 70(1), pages 91-107, March.
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