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Why Does Consumption Fluctuate in Old Age and How Should the Government Insure It?

Author

Listed:
  • Richard Blundell
  • Margherita Borella
  • Jeanne Commault
  • Mariacristina De Nardi

Abstract

In old age, consumption can fluctuate because of shocks to available resources and because health shocks affect utility from consumption. We find that even temporary drops in income and health are associated with drops in consumption and most of the effect of temporary drops in health on consumption stems from the reduction in the marginal utility from consumption that they generate. More precisely, after a health shock, richer households adjust their consumption of luxury goods because their utility of consuming them changes. Poorer households, instead, adjust both their necessary and luxury consumption because of changing resources and utility from consumption.

Suggested Citation

  • Richard Blundell & Margherita Borella & Jeanne Commault & Mariacristina De Nardi, 2020. "Why Does Consumption Fluctuate in Old Age and How Should the Government Insure It?," NBER Working Papers 27348, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27348
    Note: AG HC HE PE
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    References listed on IDEAS

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    1. Amy Finkelstein & Erzo F. P. Luttmer & Matthew J. Notowidigdo, 2009. "Approaches to Estimating the Health State Dependence of the Utility Function," American Economic Review, American Economic Association, vol. 99(2), pages 116-121, May.
    2. Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2016. "MPC heterogeneity and household balance sheets," Discussion Papers 852, Statistics Norway, Research Department.
    3. Jeanne Commault, 2016. "How Does Nondurable Consumption Respond To Transitory Income Shocks? Reconciling Natural Experiments and Structural Estimations," Working Papers hal-01328904, HAL.
    4. Thomas F. Crossley & Cormac O'Dea & Richard Blundell & Rowena Crawford & Eric French & Gemma Tetlow, 2016. "Comparing Retirement Wealth Trajectories on Both Sides of the Pond," Fiscal Studies, Institute for Fiscal Studies, vol. 37, pages 105-130, March.
    5. French Eric & Jones John Bailey & McCauley Jeremy, 2017. "The Accuracy of Economic Measurement in the Health and Retirement Study," Forum for Health Economics & Policy, De Gruyter, vol. 20(2), pages 1-16, December.
    6. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-976, October.
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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health

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