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Lifecycle Consumption Plans, Social Learning and External Habits: Experimental Evidence

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  • John Duffy
  • Enrica Carbone

Abstract

We report results from a laboratory experiment exploring the extent to which individuals can solve a deterministic, intertemporal lifecycle consumption optimization problem. The environment we study has a positive interest rate on savings and no discounting implying that the optimal consumption path should be linearly increasing over time, i.e., agents maximize their lifecycle payoff by smoothing their consumption over time. In addition to studying the individual intertemporal consumption/savings problem, we explore the role played by social information regarding the consumption/savings decisions of other, homogeneously endowed agents as well as the role played by an external habit formation specification for preferences. We find that subjects are generally closest to the conditionally optimal consumption path when they do not have access to social information on the consumption decisions made by other, similarly situated subjects or when social concerns (external habits) are explicitly incorporated into their utility functions.

Suggested Citation

  • John Duffy & Enrica Carbone, 2013. "Lifecycle Consumption Plans, Social Learning and External Habits: Experimental Evidence," Working Paper 513, Department of Economics, University of Pittsburgh, revised Sep 2013.
  • Handle: RePEc:pit:wpaper:513
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    File URL: http://www.ewi-ssl.pitt.edu/econ/files/faculty/wp/130924_wp_DuffyJohn_carbone10.pdf
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    References listed on IDEAS

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    1. Hey, John D & Dardanoni, Valentino, 1987. "Optimal Consumption under Uncertainty: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 98(390), pages 105-116, Supplemen.
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    5. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    6. Alexander L. Brown & Zhikang Eric Chua & Colin F. Camerer, 2009. "Learning and Visceral Temptation in Dynamic Saving Experiments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 197-231.
    7. Enrica Carbone, 2006. "Understanding intertemporal choices," Applied Economics, Taylor & Francis Journals, vol. 38(8), pages 889-898.
    8. Ernst Fehr & Peter K. Zych, 1998. "Do Addicts Behave Rationally?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 643-661, September.
    9. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    10. Enrica Carbone & John D. Hey, 2004. "The effect of unemployment on consumption: an experimental analysis," Economic Journal, Royal Economic Society, vol. 114(497), pages 660-683, July.
    11. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, vol. 113(490), pages 920-947, October.
    12. Feltovich, Nick & Ejebu, Ourega-Zoé, 2014. "Do positional goods inhibit saving? Evidence from a life-cycle experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 440-454.
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    Cited by:

    1. Thomas Meissner, 2016. "Intertemporal consumption and debt aversion: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 19(2), pages 281-298, June.
    2. Feltovich, Nick & Ejebu, Ourega-Zoé, 2014. "Do positional goods inhibit saving? Evidence from a life-cycle experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 440-454.

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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