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Life Cycle Time Allocation and Saving in an Imperfect Capital Market

  • Patricia Apps
  • Ray Rees

This paper combines income and expenditure with time use data to provide a unique picture of the time paths of labour supplies, saving and full consumption for two-adult households over the life cycle. These data are used to test the life cycle model presented in the paper, at the core of which is the hypothesis that households face a borrowing interest rate that rises sharply with the amount of non collateral based borrowing. The household members jointly choose time paths of time use, consumption and saving over their life cycle in the face of this capital market imperfection. This model explains the data much better than does the alternative hypothesis of a perfect capital market. Finally, households are shown to differ significantly in their saving behaviour in a way that depends on secondary earner labour supply, with a strong positive association between saving and the secondary earner's income.

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File URL: https://www.cbe.anu.edu.au/researchpapers/cepr/DP475.pdf
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Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 475.

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Length: 37 pages
Date of creation: Aug 2004
Date of revision:
Handle: RePEc:auu:dpaper:475
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  1. Marianne Baxter & Urban J. Jermann, 1999. "Household Production and the Excess Sensitivity of Consumption to Current Income," NBER Working Papers 7046, National Bureau of Economic Research, Inc.
  2. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
  3. Attanasio, Orazio P, et al, 1999. "Humps and Bumps in Lifetime Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 22-35, January.
  4. Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 275-298.
  5. Apps, P.F. & Rees, R., 1996. "Collective Labor Supply and Household Production," Papers 301, Australian National University - Department of Economics.
  6. Richard Blundell & Martin Browning & Costas Meghir, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 57-80.
  7. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  8. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
  9. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  10. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, December.
  11. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  12. Heckman, James J, 1974. "Life Cycle Consumption and Labor Supply: An Explanation of the Relationship Between Income and Consumption Over the Life Cycle," American Economic Review, American Economic Association, vol. 64(1), pages 188-94, March.
  13. Martin Browning & Mette Ejrnæs, 2002. "Consumption and Children," CAM Working Papers 2002-06, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  14. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
  15. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
  16. Apps, P.F. & Rees, R., 1998. "On the Taxation of Trade Within and Between Households," Papers 337, Australian National University - Department of Economics.
  17. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
  18. Christopher D. Carroll, 1994. "How does Future Income Affect Current Consumption?," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 111-147.
  19. Kathryn Shaw, 1994. "The Persistence of Female Labor Supply: Empirical Evidence and Implications," Journal of Human Resources, University of Wisconsin Press, vol. 29(2), pages 348-378.
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