Life-cycle Consumption: Can Single Agent Models Get It Right?

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Executive Summary

In this paper, the authors study differences between consumption predictions from a single agent model and "Adult equivalent" consumption predictions from a model where household size evolves deterministically over the life-cycle and affects individual preferences for consumption. Using a theoretical model they prove that, under mild conditions, these predictions are different. In particular, the single household model cannot explain patterns in life-cycle consumption profiles, nor cross sectional inequality in consumption originating from the second model, even after controlling for household size using equivalence scales.

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