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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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Web page: http://rse.anu.edu.au/cepr.php
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  1. Apps, P.F. & Rees, R., 1998. "On the Taxation of Trade Within and Between Households," Papers 337, Australian National University - Department of Economics.
  2. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
  3. Apps, P.F. & Rees, R., 1996. "Collective Labor Supply and Household Production," Papers 301, Australian National University - Department of Economics.
  4. 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.
  5. Martin Browning & Mette Ejrnæs, 2009. "Consumption and Children," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 93-111, February.
  6. 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.
  7. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
  8. Urban J. Jermann & Marianne Baxter, 1999. "Household Production and the Excess Sensitivity of Consumption to Current Income," American Economic Review, American Economic Association, vol. 89(4), pages 902-920, September.
  9. Carroll, Christopher D, 1994. "How Does Future Income Affect Current Consumption?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 111-47, February.
  10. 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.
  11. Martin Browning & Thomas F. Crossley, 2001. "The lifecycle model of consumption and saving," IFS Working Papers W01/15, Institute for Fiscal Studies.
  12. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May.
  13. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, June.
  14. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, March.
  15. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  16. Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
  17. Richard Blundell & Martin Browning & Costas Meghir, 1993. "Consumer demand and the life-cycle allocation of household expenditures," IFS Working Papers W93/11, Institute for Fiscal Studies.
  18. 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.
  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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