life-cycle income hypothesis
E483087
The life-cycle income hypothesis is an economic theory proposing that individuals plan their consumption and saving behavior over their lifetime to smooth consumption, based on expected lifetime income rather than current income.
Statements (48)
| Predicate | Object |
|---|---|
| instanceOf |
consumption theory
ⓘ
economic theory ⓘ microeconomic concept ⓘ saving theory ⓘ |
| alsoKnownAs | life-cycle hypothesis ⓘ |
| assumes |
forward-looking behavior
ⓘ
intertemporal budget constraint ⓘ perfect capital markets in basic form ⓘ rational expectations about lifetime income ⓘ utility maximization over the life cycle ⓘ |
| coreIdea |
consumption depends on expected lifetime income
ⓘ
consumption is smoother than current income ⓘ individuals plan consumption over their lifetime ⓘ saving is used to smooth consumption over time ⓘ |
| criticizedFor |
assuming perfect foresight or rational expectations
ⓘ
ignoring liquidity constraints in basic form ⓘ limited treatment of behavioral biases ⓘ |
| developedInDecade | 1950s ⓘ |
| empiricalIssue |
excess sensitivity of consumption to current income
ⓘ
insufficient decumulation of wealth in old age ⓘ |
| extendedBy |
behavioral life-cycle models
ⓘ
models with liquidity constraints ⓘ precautionary saving models ⓘ |
| field |
economics
ⓘ
household finance ⓘ macroeconomics ⓘ microeconomics ⓘ |
| influenced |
modern consumption-based asset pricing
ⓘ
overlapping generations models ⓘ |
| keyVariable |
expected lifetime resources
ⓘ
human wealth ⓘ non-human wealth ⓘ |
| mathematicalFormulation | intertemporal utility maximization subject to lifetime budget constraint ⓘ |
| predicts |
aggregate saving depends on demographic structure
ⓘ
consumption responds less than proportionally to temporary income changes ⓘ middle-aged individuals save during high-earning years ⓘ retired individuals dissave ⓘ young individuals borrow or save little ⓘ |
| proposedBy |
Franco Modigliani
NERFINISHED
ⓘ
Richard Brumberg NERFINISHED ⓘ |
| relatedTo |
Euler equation for consumption
ⓘ
consumption smoothing ⓘ intertemporal choice ⓘ permanent income hypothesis ⓘ |
| usedIn |
macroeconomic consumption functions
ⓘ
models of household saving behavior ⓘ pension system analysis ⓘ wealth accumulation studies ⓘ |
Referenced by (1)
Full triples — surface form annotated when it differs from this entity's canonical label.