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 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.
Author: | Holger KraftGND, Claus MunkORCiDGND, Frank Thomas SeifriedGND, Sebastian WagnerGND |
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URN: | urn:nbn:de:hebis:30:3-305683 |
URL: | http://ssrn.com/abstract=2259613 |
DOI: | https://doi.org/10.2139/ssrn.2259613 |
Parent Title (German): | SAFE working paper series ; No. 15 |
Series (Serial Number): | SAFE working paper (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 |
Page Number: | 37 |
HeBIS-PPN: | 348827970 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |