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Estimating Life-Cycle Parameters from Consumption Behavior at Retirement

Archived Abstract of Former PSC Researcher

Laitner, John, and Daniel Silverman. 2005. "Estimating Life-Cycle Parameters from Consumption Behavior at Retirement." NBER Working Paper 11163National Bureau of Economic Research.

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.

Country of focus: United States of America.

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