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Life-cycle consumption: can single agent models get it right?

  • Bick, Alexander
  • Choi, Sekyu
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    In the quantitative macroeconomics literature, single agent models are widely used to explain ``per-adult equivalent'' data, which are obtained at the household level. In this paper we suggest a simple framework to understand the sources of bias when these models are used to make predictions for aggregate consumption. In both a theoretical and a quantitative exercise, we find that economies of scale in consumption inside the household are positively related to the bias introduced by the single agent approach in predicted consumption profiles over the life-cycle. We also do an external validation exercise, which suggests that economies of scale inside the household are rather large, pointing out the need to approach life-cycle consumption with models that consider households rather than single agents.

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    File URL: http://mpra.ub.uni-muenchen.de/30910/5/MPRA_paper_30910.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30910.

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    Date of creation: Feb 2011
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    Handle: RePEc:pra:mprapa:30910
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    1. Karen Kopecky & Richard Suen, 2010. "Finite State Markov-chain Approximations to Highly Persistent Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 701-714, July.
    2. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
    3. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
    4. Lazear, Edward P & Michael, Robert T, 1980. "Family Size and the Distribution of Real Per Capita Income," American Economic Review, American Economic Association, vol. 70(1), pages 91-107, March.
    5. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
    6. Aiyagari, S.R. & Greenwood, J. & Guner, N., 1999. "On the State of the Union," RCER Working Papers 462, University of Rochester - Center for Economic Research (RCER).
    7. Krueger, Dirk & Perri, Fabrizio & Pistaferri, Luigi & Violante, Giovanni L, 2009. "Cross Sectional Facts for Macroeconomists," CEPR Discussion Papers 7582, C.E.P.R. Discussion Papers.
    8. Fatih Guvenen & Anthony Smith, 2010. "Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach," NBER Working Papers 16327, National Bureau of Economic Research, Inc.
    9. Shintaro Yamaguchi & Claudia Ruiz & Maurizio Mazzocco, 2014. "Labor Supply, Wealth Dynamics and Marriage Decisions," 2014 Meeting Papers 210, Society for Economic Dynamics.
    10. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
    11. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers gueconwpa~03-03-19, Georgetown University, Department of Economics.
    12. Julie A. NELSON, 1993. "Independent of a Base Equivalence Scales Estimation Using United States Micro-Level Data," Annales d'Economie et de Statistique, ENSAE, issue 29, pages 43-63.
    13. Orazio P. Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and Bumps in Lifetime Consumption," NBER Working Papers 5350, National Bureau of Economic Research, Inc.
    14. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June.
    15. Cubeddu, Luis & Ríos-Rull, José-Víctor, 2003. "Families as Shocks," CEPR Discussion Papers 3924, C.E.P.R. Discussion Papers.
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