Consuming, Saving, and Spending Most of Income

43 Pages Posted: 25 Oct 2004 Last revised: 7 Feb 2022

See all articles by Stefanos Delikouras

Stefanos Delikouras

University of Miami - Department of Finance

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Date Written: February 9, 2022

Abstract

This paper extends the traditional life-cycle hypothesis to allow for rewards from consumption and savings. In the new model, the utility function depends both on consumption and savings, resulting in differing marginal propensities to consume (DMPC) from current income, current wealth, and future income. Specifically, consumption is financed mostly by current income. The model explains various empirical regularities not captured by the traditional life-cycle model including the hypersensitivity of consumption to current income shocks, and the drop in individual consumption at the time of retirement.

Keywords: Savings, mental accounting, quadratic utility, consumer choice

JEL Classification: D12, E22

Suggested Citation

Delikouras, Stefanos and Korniotis, George M., Consuming, Saving, and Spending Most of Income (February 9, 2022). Available at SSRN: https://ssrn.com/abstract=608367 or http://dx.doi.org/10.2139/ssrn.608367

Stefanos Delikouras

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

George M. Korniotis (Contact Author)

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

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