Revisiting the effect of household size on consumption over the life-cycle

Alexander Bick, Sekyu Choi

Research output: Contribution to journalArticle

7 Scopus citations

Abstract

Although the link between household size and consumption has strong empirical support, there is no consistent way in which demographics are dealt with in standard life-cycle models. We study the relationship between the predictions of the Single Agent model (the standard in the literature) versus a simple model extension (the Demographics model) where deterministic changes in household size and composition affect optimal consumption decisions. We show theoretically that the Demographics model is conceptually preferable to the Single Agent model as it captures economic mechanisms ignored by the latter. However, our quantitative analysis demonstrates that differences in predictions for consumption are negligible across models, when using standard calibration strategies. This suggests that it is largely irrelevant which model specification is used.

Original languageEnglish (US)
Pages (from-to)2998-3011
Number of pages14
JournalJournal of Economic Dynamics and Control
Volume37
Issue number12
DOIs
StatePublished - Dec 1 2013

Keywords

  • Consumption
  • Life-cycle models

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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