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Short-term planning and the life-cycle consumption puzzle

Author

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  • 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, EconWPA.
  • Handle: RePEc:wpa:wuwpmi:0404003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kevin Huang & Frank Caliendo, 2011. "Rationalizing multiple consumption-saving puzzles in a unified framework," Frontiers of Economics in China, Springer;Higher Education Press, vol. 6(3), pages 359-388, September.
    2. Feigenbaum, James, 2008. "Can mortality risk explain the consumption hump?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 844-872, September.
    3. repec:eee:jeborg:v:146:y:2018:i:c:p:65-105 is not listed on IDEAS
    4. Farzin, Y. Hossein & Wendner, Ronald, 2014. "The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning," MPRA Paper 54614, University Library of Munich, Germany.
    5. Findley, T. Scott & Caliendo, Frank N., 2014. "Interacting mechanisms of time inconsistency," Journal of Economic Psychology, Elsevier, vol. 41(C), pages 68-76.
    6. repec:pit:wpaper:360 is not listed on IDEAS
    7. Caliendo, Frank N. & Findley, T. Scott, 2013. "Time inconsistency and retirement planning," Economics Letters, Elsevier, vol. 121(1), pages 30-34.
    8. Feigenbaum James A. & Li Geng, 2012. "Life Cycle Dynamics of Income Uncertainty and Consumption," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-49, May.
    9. Voß, Achim & Lingens, Jörg, 2014. "What's the damage? Environmental regulation with policy-motivated bureaucrats," CAWM Discussion Papers 67, University of Münster, Center of Applied Economic Research Münster (CAWM).
    10. Farzin, Y. Hossein & Wendner, Ronald, 2013. "Saving Rate Dynamics in the Neoclassical Growth Model – Hyperbolic Discounting and Observational Equivalence," MPRA Paper 45518, University Library of Munich, Germany.
    11. Aadland, David & Shaffer, Sherrill, 2010. "Time Compression," MPRA Paper 29298, University Library of Munich, Germany.
      • David Aadland & Sherrill Shaffer, 2012. "Time Compression," CAMA Working Papers 2012-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    12. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral economics and macroeconomic models," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 133-147.
    13. repec:ctl:louvde:v:83:y:2017:i:2:p:245-258 is not listed on IDEAS
    14. T. Findley & Frank Caliendo, 2008. "The behavioral justification for public pensions: a survey," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 32(4), pages 409-425, October.
    15. Kevin X.D. Huang & Frank Caliendo, 2007. "Rationalizing Seven Consumption-Saving Puzzles in a Unified Framework," Vanderbilt University Department of Economics Working Papers 0716, Vanderbilt University Department of Economics.
    16. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(4), pages 487-513, August.
    17. Caliendo, Frank & Huang, Kevin X.D., 2008. "Overconfidence and consumption over the life cycle," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1347-1369, December.
    18. Spiro, Daniel, 2014. "Resource prices and planning horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 159-175.
    19. Holger STRULIK, 2017. "The Health Hump," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 83(2), pages 245-258, June.
    20. Bullard, James & Feigenbaum, James, 2007. "A leisurely reading of the life-cycle consumption data," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2305-2320, November.
    21. Shantanu Bagchi, 2011. "Can overconfidence explain the consumption hump?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(1), pages 41-70, January.
    22. Feigenbaum, James, 2016. "Equivalent representations of non-exponential discounting models," Journal of Mathematical Economics, Elsevier, vol. 66(C), pages 58-71.

    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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