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Consumer Demographics Week 6

The document discusses consumer behavior over the life cycle. It describes how consumption and income follow a hump-shaped pattern, typically peaking around age 50, then declining after retirement. This pattern is inconsistent with the life-cycle hypothesis, which predicts constant consumption over the life cycle. The document analyzes factors that could explain observed consumption patterns, such as household size, cohort effects, income uncertainty, and differential mortality rates between rich and poor individuals.

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Rose
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35 views3 pages

Consumer Demographics Week 6

The document discusses consumer behavior over the life cycle. It describes how consumption and income follow a hump-shaped pattern, typically peaking around age 50, then declining after retirement. This pattern is inconsistent with the life-cycle hypothesis, which predicts constant consumption over the life cycle. The document analyzes factors that could explain observed consumption patterns, such as household size, cohort effects, income uncertainty, and differential mortality rates between rich and poor individuals.

Uploaded by

Rose
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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6.

LIFE CYCLE OF CONSUMERS


LIFE CYCLE EVENTS
 Young singles  family formation  low income
 Young family (full nest I)  reproduction  increased income
 Older couple w/ dependent children (full nest II)  child-rearing  higher/highest income
 Older couple; no child at home; retired (empty nest)  children leave, family/relationship breakdown
 income declines

ECO PERSPECTIVES
 People consume to pursue eco interest
 Keynes: consumption expenditure highly dependable/stable function of current income
 Modigliani: consumption patterns at diff ages can be independent of incomes at each age due to idea
of maximisation of consumption over life time

MODIGLIANI’S LIFE-CYCLE HYPOTHESIS


 Consumers are life-time maximisers; consider life-time income (Y) & determine savings rate (S) that
will enable them to maintain max consumption level (C) over life time, incl consumption after
retirement
 Consumers will postpone consumption throughout working life & accumulate wealth (W) to maintain
usual consumption level after retirement
 C will remain constant over lifetime; wealth from savings will peak at time of retirement  drop to 0
at time of death
 People tend to even out consumption levels in times of lower income after retirement by usuing
wealth accumulated from savings during working life before retirement

LIFE-CYCLE HUMPS
 Both household consumption/income show hump-shaped patterns during life cycle  b/c household
consumption closely related to income & usually peaks around 50 y/o; expenditure also related to life
cycle events
 Lower expenditure early in adult life as income levels lower; expenditures increase until around
40/50s when expenditure tends to reach peak level; household expenditure/income drops
considerably after 65 as more people leave workforce
 Inconsistent w/ Modigliani’s life-cycle hypothesis

LIFE-CYCLE QUADRATIC EQUATION


 Hump-shaped pattern  quadratic equation: y = a + bx – cx^2
o Y = household expenditure/income (DV)
o X = age of household head (IV)

CONCEPTUAL & MEASUREMENT ISSUES


Issues w/ cross-sectional data in household surveys
 Main issue: cohort info not avail in cross-sectional data  diff cohorts exposed to diff eco/income
conditions over life times that affect savings + accumulated wealth
 Trend for income to rise over time due to productivity improvements; people born in earlier cohorts
might be poorer than people born in later cohorts
 Decline in household expenditure late in life observed in cross-sectional data might be caused by
lower income over time rather than decline in consumption due to age

Fertility (family size) affects estimation of age profiles of household expenditures


 Fertility  humps in no. of people in household; no. of people increases as children born, drop when
children leave home to form own households
 Household exp should reflect increasing needs of children as grow up + departure from home (rise in
household exp then decline)
 Multiple generation living arrangement could also affect household exp
Equivalence measures & economies of scale
 One way to account for no. of people in estimation of age profile of household exp = divide household
exp by no. of people in household & obtain expenditure per capita  more accurate picture
 Issues
o Some exp part of household G (fridge, car, furniture, house)
o Some exp incremental depending on no. of people in household (food, clothing, school
fees/uniforms, childcare)

Household number equivalence scales


 OECD scale most recognised household no. equivalent scale; incremental of 0.7 for 2 nd person, then
add incremental of 0.5 for each additional member

DIFFERENTIAL MORTALITY: RICH VS POOR


 Some models relate household resources for consumption to income + accumulated wealth through
life-time savings
 Evidence shows people cont to save even after retirement (contrary to Modigliani’s hypothesis) 
explained by differential mortality b/w wealthier/poorer people
o Wealthier people have lower mortality rates  older cohorts could be richer as no. of
longer-living richer people become larger proportion of older cohorts
o Richer people have higher propensity to save  avg savings rate of older cohorts rises
o Lack of dissaving in older ages observed in cross-sectional data could partially account for
differential survival rather than ageing

MALE VS FEMALE
 Large no. of females among 65+ & larger proportion of household headed by females
 Income gaps prevalent, gaps may increase after retirement
 Differentials in mortality/income contribute to decline in avg household income after retirement +
loss of income from employment

DEMOGRAPHIC & OTHER FACTORS IN LIFE-CYCLE CONSUMER BEHAVIOUR (3)


No. of people in household
 Much of variance in household consumption explained by hump in no. of people in household during
life cycle
 No. of people in household tends to peak somewhat earlier than peaks in household
income/consumption
 Degree of explanation of consumer behaviour by no. of people in households depends on equivalence
scale used & may account for up to 50% of hump in household consumption

Age of household head


 Cohort effects found in studies; cohorts born before mid-1930s had higher fertility + larger no. of
children
 Levels of HH exp/incomes sig depend on household head age

Household income
 Affected by labour force participation + employment
 Unemployment associated w/ lower household consumption but decline in consumption after
retirement tends to be greater
 People working generally consume more than those retired

RETIREMENT PUZZLES: CONSUMPTION & SAVING


Retirement & older pop
 Baby boomers born in period of high fertility rates; will be retiring in next decade or 2

Consumption & savings at later age


 Empirical evidence indicated level of life-time income, family size, employment-related exp could
explain considerable proportion of hump-shaped age profile of household consumption during life
cycle
 Considerable residual hump in consumption that starts low early in life cycle, peaks around 50 &
drops substantially after retirement (contrary to behaviour proposed in Modigliani’s LCH) 
consumption retirement puzzle
 On avg, household cont to save after retirement (contrary to Modigliani)  saving retirement puzzle

FACTORS EXPLAINING OBSERVED HUMP & POST-RETIREMENT CONSUMER BEHAVIOUR


 Credit/liquidity
o Younger households harder to access credit; forced to delay consumption/saving
o As savings grows, credits become avail  enable households to increase consumption in
middle ages
o Although wealth increased in later life cycle, some assets (house) not liquid & impose
liquidity constraints on household spending
 Income uncertainty
o Income uncertain in younger age  postpone spending
o Uncertainty decreases as people age & increase savings
 Life uncertainty: unknown life expectancy  reduce exp
 Gender differentials in life expectancy/income
 Bequest motivation: people cont to save in old age could be motivated by leaving assets to children
 Leisure choice: more time for home production (food/household services)  less consumption
 Unanticipated shocks

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