Consumption Over the Life Cycle

TLDR: In this paper, a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty is proposed. But the model is not suitable for the general population.

Abstract: This paper estimates a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty. We employ synthetic cohort techniques and Consumer Expenditure Survey data to construct average age-profiles of consumption and income over the working lives of typical households across different education and occupation groups. The model fits the profiles quite well. In addition to providing reasonable estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life cycle. Young consumers behave as buffer-stock agents. Around age 40, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. Our methodology provides a natural decomposition of saving and wealth into its precautionary and life-cycle components.

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NBER WORKING PAPER SERIES
CONSUMPTION OVER THE LIFE CYCLE
Pierre-Olivier Gourinchas
Jonathan A. Parker
Working Paper 7271
http://www.nber.org/papers/w7271
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
July 1999
We wish to thank Olivier Jean Blanchard, Ricardo Caballero, Chris Carroll, and Angus Deaton for detailed
comments and encouragement. We also thank Daron Acemoglu, Orazio Attanasio, David Card, Charles
Fleischman, Eric French, Gregori Kosenok, Franco Madigliani, Steve Pischke, Nicholas Souleles, Robert
Shimer, anonymous referees, and seminar participants at the Board of Governors of the Federal Reserve,
Chicago, Columbia, Harvard, Michigan, MIT, Princeton, Stanford, Tillburg, Wisconsin, and Yale. Parker
gratefully acknowledges financial support from the Sloan Foundation. Eric French provided excellent
assistance in our revisions. The views expressed herein are those of the authors and not necessarily those of
the National Bureau of Economic Research.
© 1999 by Pierre-Olivier Gourinchas and Jonathan A. Parker. All rights reserved. Short sections of text, not
to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including ©
notice, is given to the source.

Consumption Over the Life Cycle
Pierre-Olivier Gourinchas and Jonathan A. Parker
NBER Working Paper No. 7271
July 1999
JEL No. C61, D91, E21
ABSTRACT
This paper employs a synthetic cohort technique and Consumer Expenditure Survey data to
construct average age-profiles of consumption and income over the working lives of typical
households across different education and occupation groups. Using these profiles, we estimate a
structural model of optimal life-cycle consumption expenditures in the presence of realistic labor
income uncertainty. The model fits the profiles quite well. In addition to providing tight estimates
of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life-
cycle. Young consumers behave as buffer-stock agents. Around age 40, the typical household starts
accumulating liquid assets for retirement, and its behavior mimics more closely that of a certainty
equivalent consumer. This change in behavior is mostly driven by the life-cycle profile of expected
income. Our methodology provides a natural decomposition of saving into its precautionary and
retirement components.
Pierre-Olivier Gourinchas Jonathan A. Parker
Department of Economics Department of Economics
Princeton University University of Wisconsin
Princeton, NJ 08544 1180 Observatory Drive
and NBER Madison, WI 53706
pog@princeton.edu jparker@ssc.wisc.edu

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Frequently asked questions

Q1. What are the contributions in this paper?

This paper employs a synthetic cohort technique and Consumer Expenditure Survey data to construct average age-profiles of consumption and income over the working lives of typical households across different education and occupation groups.