life-cycle hypothesis


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life-cycle hypothesis

the hypothesis that states that current CONSUMPTION is not dependent solely on current DISPOSABLE INCOME but is related to a person's anticipated lifetime INCOME. For example, a young worker may purchase products such as a house on extended CREDIT because he or she expects his or her future income to rise as he or she moves up a salary scale or obtains increases in basic wage rate and thus will be able to pay future interest and repayment charges. By contrast, an older worker nearing retirement may limit his or her consumption from current income in anticipation that his or her income will fall after retirement. Long-term consumption may also be related to changes in a person's WEALTH, in particular the value of his or her house, over time.

The economic significance of the life-cycle hypothesis is that in the short term the level of consumption may be higher (or lower) than that indicated by the level of current disposable income. See KEYNESIAN ECONOMICS, CONSUMPTION FUNCTION, PERMANENT INCOME HYPOTHESIS.

References in periodicals archive ?
In reaction to this counterintuitive idea, Thaler and his colleague Hersh Sheffrin proposed the "behavioral life-cycle hypothesis," in which consumption depends both on one's mental accounts and on one's lifetime wealth.
Their results provide mixed support for the life-cycle hypothesis and the permanent income hypothesis, and are consistent with the existence of inertia or persistence in household saving behavior.
Second, according to Albert Ando and Franco Modigliani's life-cycle hypothesis, individuals spread their lifetime consumption over the span of their lives by accumulating savings during earning years and maintaining consumption levels during retirement.
Given the life-cycle hypothesis, this type of intergenerational risk sharing reinforces the preference of younger people to invest in equity (Heeringa, 2008).
The objective of this paper is to provide a sound theoretical framework for the empirical analysis of consumer indebtedness, by integrating Portfolio theory with the Life-Cycle hypothesis (LCH) model of consumption.
After describing the economic legacy of Ando, contributors offer their research on the age-saving profile and the life-cycle hypothesis, estimates of wealth effects of capital gains on Italian households, demographic and economic changes at the personal level in Italy, the question of whether the elderly save inappropriately in Japan, robust monetary policy, the euro and the transmission of monetary policy, monetary and fiscal policy in a liquidity trap, non-affine structure and systematic risk sources in generalized duration, the over-investment hypothesis, designing indexed units of account, land prices and business fixed investments in Japan, and, in closing, rationality, behavior and switching idiosyncrasies in the euro-dollar exchange rate.
Another area of Modigliani's fundamental contribution to economics is his life-cycle hypothesis of the consumption function.
The results support the life-cycle hypothesis of savings.
The primary behavioral theory is the behavioral life-cycle hypothesis (Shefrin and Thaler, 1988) that is grounded in an "economic theory of self-control" (Thaler and Shefrin, 1981).
Modigliani, "The Life-Cycle Hypothesis of Saving: Aggregate Implications and Tests," American Economic Review, vol.
One possible explanation may be life-cycle hypothesis.
The life-cycle hypothesis postulates that individuals spread their consumption evenly over their life spans by saving during the earning span and dissaving during retirement (Ando and Modigliani, 1963).