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Revealed preference and consumption behaviour at retirement

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  • Peter Levell

    (Institute for Fiscal Studies and Institute for Fiscal Studies)

Abstract

This paper sets out revealed preference tests for different models of consumption behaviour over retirement that we applied to a Spanish consumption panel dataset. We reject the perfect foresight model both with separable preferences and allowing for preference change. The first order conditions for the life-cycle model allowing for uncertainty do not provide very strong restrictions on possible choices. In fact they are no stronger than those implied by the most basic revealed preference requirement: GARP. We then go on to investigate the patterns of deviations from a perfectly smoothed marginal utility of wealth and ask whether they fit the predictions of the life-cycle model. We find a tendency of these to increase over time, suggesting consumption falls more than we'd expect. After considering various possible explanations, we settle on non-rational behaviour as the most plausible.

Suggested Citation

  • Peter Levell, 2014. "Revealed preference and consumption behaviour at retirement," IFS Working Papers W14/29, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:14/29
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    References listed on IDEAS

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