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Consumption Habits and Humps
We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence ...
Life Insurance Demand under Health Shock Risk
This paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy long-term ...
Consumption and Wage Humps in a Life-Cycle Model with Education
The observed hump-shaped life-cycle pattern in individuals’ consumption cannot be explained by the classical consumption-savings model. The consensus explanation is that the hump is caused by constraints and unspanned ...