Abstract
| Original language | English |
|---|---|
| Journal | Economic Theory |
| Volume | 64 |
| Issue number | 2 |
| Pages (from-to) | 305–330 |
| Number of pages | 26 |
| ISSN | 0938-2259 |
| DOIs | |
| Publication status | Published - Aug 2017 |
Bibliographical note
Published online: 13 June 2016Keywords
- Consumption hump
- Life-cycle utility maximization
- Habit formation
- Impatience
Cite this
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Consumption Habits and Humps. / Kraft, Holger; Munk, Claus; Seifried, Frank Thomas; Wagner, Sebastian.
In: Economic Theory, Vol. 64, No. 2, 08.2017, p. 305–330.Research output: Contribution to journal › Journal article › Research › peer-review
TY - JOUR
T1 - Consumption Habits and Humps
AU - Kraft, Holger
AU - Munk, Claus
AU - Seifried, Frank Thomas
AU - Wagner, Sebastian
N1 - Published online: 13 June 2016
PY - 2017/8
Y1 - 2017/8
N2 - 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 can quantitatively reproduce the hump observed in US consumption data from the Consumer Expenditure Survey.
AB - 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 can quantitatively reproduce the hump observed in US consumption data from the Consumer Expenditure Survey.
KW - Consumption hump
KW - Life-cycle utility maximization
KW - Habit formation
KW - Impatience
KW - Consumption hump
KW - Life-cycle utility maximization
KW - Habit formation
KW - Impatience
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U2 - 10.1007/s00199-016-0984-1
DO - 10.1007/s00199-016-0984-1
M3 - Journal article
VL - 64
SP - 305
EP - 330
JO - Economic Theory
JF - Economic Theory
SN - 0938-2259
IS - 2
ER -