Estimating Life-Cycle Parameters from Consumption Behavior at Retirement

TitleEstimating Life-Cycle Parameters from Consumption Behavior at Retirement
Publication TypeReport
Year of Publication2005
AuthorsLaitner, J, Silverman, DS
InstitutionThe University of Michigan, Michigan Retirement Research Center
Call Numberwp_2005/MRRCwp099.pdf
KeywordsConsumption and Savings, Event History/Life Cycle, Retirement Planning and Satisfaction
Abstract

Using pseudo-panel data, we estimate the structural parameters of a life cycle consumption model with discrete labor supply choice. A focus of our analysis is the abrupt drop in consumption upon retirement for a typical household. The literature sometimes refers to the drop, which in the U.S. Consumer Expenditure Survey we estimate to be approximately 16 , as the retirement consumption puzzle. Although a downward step in consumption at retirement contradicts predictions from life cycle models with additively separable consumption and leisure, or with continuous work-hour options, a consumption jump is consistent with a setup having nonseparable preferences over consumption and leisure and requiring discrete work choices. This paper specifies a life cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at retirement to provide an advantageous method of identifying structural parameters most importantly, the intertemporal elasticity of substitution.

URLhttp://www.mrrc.isr.umich.edu/publications/papers/
Endnote Keywords

Consumption/Life Cycle Models/Retirement Behavior

Endnote ID

16480

Citation Key5637