Consumption habits and humps : [Version 23 June 2013]

We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the abse
We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence of habit formation, an impatient individual would prefer a decreasing consumption path over life. However, because of habit formation, a high initial consumption would lead to high required consumption in the future. To cover the future required consumption, wealth is set aside, but the necessary amount decreases with age which allows consumption to increase in the early part of life. At some age, the impatience outweighs the habit concerns so that consumption starts to decrease. We derive the optimal consumption strategy in closed form, deduce sufficient conditions for the presence of a consumption hump, and characterize the age at which the hump occurs. Numerical examples illustrate our findings. We show that our model calibrates well to U.S. consumption data from the Consumer Expenditure Survey.
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Metadaten
Author:Holger Kraft, Claus Munk, Frank Thomas Seifried, Sebastian Wagner
URN:urn:nbn:de:hebis:30:3-305683
URL:http://ssrn.com/abstract=2259613
DOI:http://dx.doi.org/10.2139/ssrn.2259613
Parent Title (German):SAFE working paper series ; No. 15
Series (Serial Number):SAFE working paper series (15)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/06/27
Tag:Consumption hump; habit formation; impatience; life-cycle utility maximization
Issue:Version 23 June 2013
Pagenumber:37
HeBIS PPN:348827970
Institutes:Wirtschaftswissenschaften
House of Finance (HoF)
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:D11 Consumer Economics: Theory
D14 Personal Finance
D91 Intertemporal Consumer Choice; Life Cycle Models and Saving
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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