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Short-term planning and the life-cycle consumption puzzle

  • Frank Caliendo

    (Northern Arizona University)

  • David Aadland

    (University of Wyoming)

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.

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Paper provided by EconWPA in its series Microeconomics with number 0404003.

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Length: 16 pages
Date of creation: 07 Apr 2004
Date of revision:
Handle: RePEc:wpa:wuwpmi:0404003
Note: Type of Document - pdf; pages: 16
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  19. repec:fth:harver:1435 is not listed on IDEAS
  20. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
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  26. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
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  28. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
  29. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
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  31. Kemp, Murray C & Long, Ngo Van, 1977. "Optimal Control Problems with Integrands Discontinuous with Respect to Time," The Economic Record, The Economic Society of Australia, vol. 53(142&143), pages 405-20, June-Sept.
  32. Sendhil Mullainathan & Richard H. Thaler, 2000. "Behavioral Economics," NBER Working Papers 7948, National Bureau of Economic Research, Inc.
  33. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1993. "The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving," NBER Working Papers 4516, National Bureau of Economic Research, Inc.
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