Research and Analysis by David H. Richardson

Social Security, Uncertainty Adjustments, and the Consumption Decision
ORES Working Paper No. 40 (released November 1989)
by Dean R. Leimer and David H. Richardson

This paper reports on an analysis of the consumption decisions of individuals. A consumption function is developed that can be viewed as an extension of the traditional life cycle-permanent income specification, with consumption determined as an age-specific proportion of current and prospective wealth. Special attention is focused on the degree of substitutability between current and prospective wealth and on the differential effects of the various types of prospective income flows on the consumption decision.