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Lifecycle consumption under different income profiles: Evidence and theory

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  • Duffy, John
  • Li, Yue

Abstract

We report on a series of economic decision-making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles, representing different pension replacement rates. We aim to assess whether variations in pension replacement rates might aid or hinder individuals’ ability to make good lifecycle consumption and saving plans. We find that pension replacement rates matter for subjects’ experimental payoffs and consumption behavior. In particular, our treatment with a 100% pension replacement rate yields the highest experimental payoff, and more subjects in this treatment choose the status quo strategy of consuming endowments in every period. We show that a model of rational inattention is useful for explaining subjects’ responses to different pension replacement rates.

Suggested Citation

  • Duffy, John & Li, Yue, 2019. "Lifecycle consumption under different income profiles: Evidence and theory," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 74-94.
  • Handle: RePEc:eee:dyncon:v:104:y:2019:i:c:p:74-94
    DOI: 10.1016/j.jedc.2019.05.006
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    Cited by:

    1. Marcela Ibanez & Sebastian O. Schneider, 2023. "Income Risk, Precautionary Saving, and Loss Aversion – An Empirical Test," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2023_06, Max Planck Institute for Research on Collective Goods.
    2. Manger, Mark S. & Matthews, J. Scott, 2021. "Knowing when to splurge: Precautionary saving and Chinese-Canadians," Journal of Asian Economics, Elsevier, vol. 76(C).
    3. Airaudo, Marco, 2020. "Temptation and forward-guidance," Journal of Economic Theory, Elsevier, vol. 186(C).
    4. John Duffy, 2022. "Why macroeconomics needs experimental evidence," The Japanese Economic Review, Springer, vol. 73(1), pages 5-29, January.
    5. Assenza, Tiziana & Cardaci, Alberto & Chaliasos, Michael, 2023. "Consumption and account balances in crises: Have we neglected cognitive load?," IMFS Working Paper Series 197, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    6. Lu, Kelin, 2022. "Overreaction to capital taxation in saving decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    7. Bachmann, Kremena & Lot, Andre & Xu, Xiaogeng & Hens, Thorsten, 2023. "Experimental Research on Retirement Decision-Making: Evidence from Replications," Journal of Banking & Finance, Elsevier, vol. 152(C).
    8. Assenza, Tiziana & Cardaci, Alberto & Haliassos, Michael, 2024. "Consumption and Account Balances in Crises: Have We Neglected Cognitive Load?," TSE Working Papers 24-1499, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Lifecycle model; Consumption and savings; Retirement planning; Public pensions; Behavioral and experimental economics; Rational inattention;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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