Estimating Life-Cycle Parameters from Consumption Behavior at Retirement
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.
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