NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Estimating Life-Cycle Parameters from Consumption Behavior at Retirement

John Laitner, Dan Silverman

NBER Working Paper No. 11163
Issued in March 2005
NBER Program(s):   EFG

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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Document Object Identifier (DOI): 10.3386/w11163

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