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Economic theories of intertemporal consumption seek to explain people's preferences in relation to consumption and saving over the course of their life. The earliest work on the subject was by Irving Fisher and Roy Harrod who described 'hump saving', hypothesizing that savings would be highest in the middle years of a persons life as they saved for retirement. Preference (or taste) is a concept, used in the social sciences, particularly economics. ...
Jump to: navigation, search Consumption is the using up of a resource. ...
Save might refer to: Save (sport) - to stop a goal or maintain the lead To save a document in computer file management (see also Saving a webpage) The River Save (Zimbabwe), Zimbabwe The River Save (Hungary), Hungary -- joins the Danube just above Belgrade. ...
Irving Fisher (February 27, 1867 Saugerties, New York — April 29, 1947, New York) was an American economist health campaigner and eugenicist. ...
Sir Roy Forbes Harrod was an English economist. ...
In the 1950s more well-defined models built on discounted utility theory and approached the question of intertemporal consumption as a lifetime income optimization problem. Solving this problem mathematically, assuming that individuals are rational and have access to complete markets, Modigliani & Brumberg (1954), Albert Ando, and Milton Friedman (1957) developed what became known as the life-cycle model. This model predicts that people consume an annuity of their expected lifetime income at all points in their life. Thus, the lifetime consumption profile was expected to be essentially flat, with people borrowing against future earnings during their early study and working life when income is low, saving greatly during their most productive working years and consuming saved assets during retirement. Windfall gains would be treated the same way as an unexpected increase in income - its lifetime annuity value would be consumed and the rest saved. In calculating the present value of a good, economists, accountants, underwriters, and other financial analysts add together the value of the good now and its discounted value in the future. ...
Franco Modigliani (June 18, 1918 – September 25, 2003) was an Italian-American economist at the MIT Sloan School of Management, and winner of The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1985. ...
Jump to: navigation, search Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known primarily for his work on macroeconomics and for his advocacy of laissez-faire capitalism. ...
Jump to: navigation, search The term annuity (from Latin annus, a year), in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. ...
Attempts to test the life-cycle model against real world data have met with mixed success. In a review of the literature, Courant, Gramlich and Laitner (1984) note "but for all its elegance and rationality, the life-cycle model has not tested out very well." The main discrepancies between predicted and actual behaviour is that people drastically 'underconsume' early and late in their lifetime by failing to borrow against future earnings and not saving enough to adequately finance retirement incomes respectively. People also seem to 'overconsume' during their highest earning years, the elderly do not consume from their assets as would be expected (particularly from their household equity) and also treat windfall gains in a manner inconsistent with the life-cycle model. Specific alterations to the theory have been proposed to help it accommodate the data; a bequest motive, capital market imperfections such as liquidity constraints, a changing individual utility function over time or a particular form of expectation as to future income. This article is about utility in economics and in game theory. ...
Behavioural economists have proposed an alternate description of intertemporal consumption, the behavioural life cycle hypothesis. They propose that people mentally divide their assets into non-fungible mental accounts - current income, current assets (savings) and future income. The marginal propensity to consume (MPC) out of each of these accounts is different. Drawing upon empirical studies of consumption, superannuation and windfall gains they hypothesize that the MPC is close to one out of current income, close to zero for future income and somewhere in between with respect to current assets. These differing MPCs explain why people 'overconsume' during their highest earning years, why increasing superannuation contributions does not cause current savings to be reduced (as the life-cycle model implies) and why small winfall gains (which are coded as current income) are consumed at a high rate but a higher proportion of larger gains is saved. Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ...
A concept first named by Richard Thaler (1980), mental accounting attempts to describe the process whereby people code, categorise and evaluate economic outcomes. ...
The marginal propensity to consume (MPC) refers to the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers). ...
A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. ...
See also Jose Victor Rios Rull is a macroeconomist born in Spain, currently (2004) at the Department of Economics, University of Pennsylvania. ...
Wealth elasticity of demand in microeconomics is the proportional change in the consumption of a good caused by unanticipated net wealth changes (as opposed to changes in personnel income). ...
References - Fisher, I (1930): The Theory of Interest
- Harrod, R. (1948): Towards a Dynamic Economics
- Friedman, M. (1957): A Theory of the Consumption Function
- Modigliani, F. & Brumberg, R. (1954): 'Utility analysis and the consumption function: An interpretation of cross-section data'. In: Kurihara, K.K (ed.): Post-Keynesian Economics
- Shefrin, H. & Thaler, R. (1992): 'Mental Accounting, Saving and Self-Control'. In: Lowenstein, G. & Elster, J. (eds.) Choice over Time
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