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Short-term planning and the life-cycle consumption puzzle

Author

Listed:
  • Frank Caliendo

    (Northern Arizona University)

  • David Aadland

    (University of Wyoming)

Abstract

This paper provides a new explanation for the hump-shaped age- consumption profile observed in household data. Standard life-cycle models are based on an optimization problem that spans the entire life expectancy. Alternatively, we examine the consumption profile of an individual with a shorter planning horizon. The actual consumption profile is the envelope of a continuum of control problems because the agent’s short-term planning horizon continually slides along the time- scale, and the agent is therefore continually re-optimizing. We derive analytical solutions to a deterministic, continuous-time control model with this characteristic and we show that hump-shaped consumption is a feature of the model.

Suggested Citation

  • Frank Caliendo & David Aadland, 2004. "Short-term planning and the life-cycle consumption puzzle," Microeconomics 0404003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:0404003
    Note: Type of Document - pdf; pages: 16
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Short-term planning; Hump-shaped consumption;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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