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Life-Cycle Consumption: Can Single Agent Models Get it Right?

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  • Alexander Bick

    (Goethe University Frankfurt)

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    Abstract

    In the quantitative macro literature, single agent models are heavily used to explain "adult equivalent" household data, a common example being household consumption deflated by some form of equivalence scale. In this paper, we study differences between the consumption of single agent models and the "adult equivalent" household consumption from a model where household size is taken into account. Using a theoretical model we prove that, under mild conditions, these predictions are different. Through a quantitative exercise, we then document that these differences can be substantial with a large variation over the life-cycle.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 940.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:940

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    1. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2345, C.E.P.R. Discussion Papers.
    2. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 228, Carnegie Mellon University, Tepper School of Business.
    3. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009. "Unequal we stand: an empirical analysis of economic inequality in the United States, 1967-2006," Staff Report, Federal Reserve Bank of Minneapolis 436, Federal Reserve Bank of Minneapolis.
    4. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 2(4), pages 53-87, October.
    5. Karen Kopecky & Richard Suen, 2010. "Finite State Markov-chain Approximations to Highly Persistent Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 701-714, July.
    6. Attanasio, Orazio P, et al, 1999. "Humps and Bumps in Lifetime Consumption," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 17(1), pages 22-35, January.
    7. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
    8. Jesus Fernandez-Villaverde & Dirk Krueger, 2002. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," NBER Working Papers 9382, National Bureau of Economic Research, Inc.
    9. 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.
    10. Fatih Guvenen & Anthony Smith, 2010. "Inferring labor income risk from economic choices: an indirect inference approach," Staff Report, Federal Reserve Bank of Minneapolis 450, Federal Reserve Bank of Minneapolis.
    11. Hong, Jay H. & Rios-Rull, Jose-Victor, 2007. "Social security, life insurance and annuities for families," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(1), pages 118-140, January.
    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.
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