Deconstructing Lifecycle Expenditure

58 Pages Posted: 21 Mar 2008 Last revised: 17 Aug 2014

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2008

Abstract

In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar "hump" shaped lifecycle profile of nondurable expenditures. We document that the behavior of total nondurables masks surprising heterogeneity in the lifecycle profile of individual sub-components. We find, for example, that while food expenditures decline after middle age, expenditures on entertainment continue to increase throughout the lifecycle. These patterns pose a challenge to models that emphasize inter-temporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment, to explain the lifecycle profile of expenditures. Second, we document that the increase in the cross-sectional dispersion of expenditure over the lifecycle is not greater for luxuries. In particular, the dispersion in entertainment expenditure declines relative to food expenditures as households become older, casting further doubt on theories that emphasize (exclusively) shocks to permanent income to explain the rising cross sectional expenditure dispersion over the lifecycle. We propose and test a Beckerian model that emphasizes intra-temporal substitution between time and expenditures as the opportunity cost of time varies over the lifecycle. We find this alternative model successfully explains the joint behavior of food and entertainment expenditures in the latter half of the lifecycle. The model, however, is less successful in explaining expenditure patterns early in the lifecycle.

Suggested Citation

Aguiar, Mark and Hurst, Erik, Deconstructing Lifecycle Expenditure (March 2008). NBER Working Paper No. w13893, Available at SSRN: https://ssrn.com/abstract=1112005

Mark Aguiar

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Erik Hurst (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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