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An experimental test on dynamic consumption and lump-sum pensions

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  • Enrique Fatás

    ()

  • Juan Lacomba

    ()

  • Francisco Lagos

    ()

  • Ana Moro-Egido

    ()

Abstract

This article examines the potential risks on consumption behavior of lump-sum payments. As a pension, lump-sum payments could be consumed too fast and generate an increase of poverty rates. We experimentally investigate consumption behavior in an inter-temporal decision-making setting. Subjects make consumption and saving decisions in an environment with two central features: first, there exists a decreasing probability of survival; and second, in addition to the regular income they get while active, they receive a unique lump-sum payment when retired. The results of this experiment show that rather than consuming too much during their income periods, subjects show a persistent precautionary saving behavior and over-save in the vast majority of periods. This result seems to be mainly driven by the risk averse individuals. Copyright The Author(s) 2013

Suggested Citation

  • Enrique Fatás & Juan Lacomba & Francisco Lagos & Ana Moro-Egido, 2013. "An experimental test on dynamic consumption and lump-sum pensions," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(4), pages 393-413, November.
  • Handle: RePEc:spr:series:v:4:y:2013:i:4:p:393-413
    DOI: 10.1007/s13209-013-0098-y
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    File URL: http://hdl.handle.net/10.1007/s13209-013-0098-y
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    References listed on IDEAS

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    1. Enrique Fatas & Juan A. Lacomba & Francisco Lagos, 2007. "An Experimental Test On Retirement Decisions," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 602-614, July.
    2. Fisher, Jonathan D. & Johnson, David S. & Marchand, Joseph & Smeeding, Timothy M. & Torrey, Barbara Boyle, 2008. "The retirement consumption conundrum: Evidence from a consumption survey," Economics Letters, Elsevier, vol. 99(3), pages 482-485, June.
    3. Hans Fehr & Wenche Irén Sterkeby & Øystein Thøgersen, 2003. "Social security reforms and early retirement," Journal of Population Economics, Springer;European Society for Population Economics, vol. 16(2), pages 345-361, May.
    4. Barbara A. Butrica & Gordon B.T. Mermin, 2006. "Annuitized Wealth and Consumption at Older Ages," Working Papers, Center for Retirement Research at Boston College wp2006-26, Center for Retirement Research, revised Dec 2006.
    5. Hamermesh, Daniel S & Menchik, Paul L, 1987. "Planned and Unplanned Bequests," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 55-66, January.
    6. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    7. Breyer, Friedrich & Kifmann, Mathias, 2002. "Incentives to retire later a solution to the social security crisis?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(02), pages 111-130, July.
    8. Robert S. Gazzale & Lina Walker, 2009. "Behavioral Biases in Annuity Choice: An Experiment," Department of Economics Working Papers 2009-01, Department of Economics, Williams College.
    9. Enrica Carbone & John D. Hey, 2004. "The effect of unemployment on consumption: an experimental analysis," Economic Journal, Royal Economic Society, vol. 114(497), pages 660-683, July.
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    Cited by:

    1. van der Heijden, E.C.M. & Koç, E. & Ligthart, J.E. & Meijdam, A.C., 2015. "Pensions and Consumption Decisions: : Evidence From the Lab," Discussion Paper 2015-014, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    Experimental test; Consumption; Savings; Lump-sum payment; C91; H55; J26;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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