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| Title: | Deconstructing Lifecycle Expenditure |
| Authors: | Aguiar, Mark
Hurst, Erik |
| Issue Date: | Jan-2008 |
| Publisher: | Michigan Retirement Research Center, University of Michigan, P.O. Box 1248, Ann Arbor, MI 48104 |
| Series/Report no.: | WP 2008-173 |
| Abstract: | In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar “hump” shaped lifecycle profile of nondurable expenditures. We document that the behavior of total nondurables masks surprising heterogeneity in the lifecycle profile of individual sub-components. We find, for example, that while food expenditures
decline after middle age, expenditures on entertainment continue to increase throughout
the lifecycle. These patterns pose a challenge to familiar lifecycle models that emphasize inter-temporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment. Secondly, we document that the increase in the cross-sectional dispersion of expenditure over the lifecycle is not greater for luxuries. In particular, the dispersion in entertainment expenditure declines relative to food expenditures as households become older, casting further doubt on theories that emphasize (exclusively) shocks to permanent income. We propose and test a Beckerian model that emphasizes intra-temporal substitution between time and expenditures as the
opportunity cost of time varies over the lifecycle. We find this alternative model
successfully explains the joint behavior of food and entertainment expenditures in the
latter half of the lifecycle. The model, however, is less successful in explaining
expenditure patterns during the early half of the lifecycle. |
| URI: | http://hdl.handle.net/2027.42/60272 |
| Other Identifiers: | UM08-06 |
| Appears in Collections: | Retirement Research Center, Michigan (MRRC)
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| wp173.pdf | | 670Kb | Adobe PDF | View/Open |
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