Multi Generation Life Cycle Theory

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So far, the above consumption models were simplified to two-periods only, and two-dimensional graphical representation of period-1 and period-2 were feasible. One interesting feature about how individuals consume and save over their life-cycle cannot be well addressed using two period framework. The next two subsections deliberate some models that generalises the two-period case to multi period case. Since graphical representation may encounter much challenges for multi-period, one solution for multi-period generation is via the use of algebraic expressions. The life cycle theory The life-cycle theory assumes that households plan their consumption and savings attitudes over the course of their lifetime. Thus individuals even-out their consumption…show more content…
saving is determined only by one’s tastes. Zero interest rate assumption Deriving the base life cycle hypothesis Modigliani and Brumberg in the 1950s established a theory upon observation of people making their consumption decisions relied on available lifetime resources and that available at one’s current life period. They observed accumulation of assets at early working stage, and then making use of stored assets when retired. In addition, people were observed not only to save for retirement, but also found to adjust their consumption paths at each stage of their lives, as follows. Assuming that each person live for T-periods and at each period t, one faces a budget constraint similar to that of the two-period model as: y_t+b_(t-1) (1+r)=c_t+b_t 2.4.2 Just like that of two-period case, the derived intertemporal budget constraint is: y_1+y_2/(1+r)+⋯+y_T/(1+r)^(T-1) +b_0 (1+r)=c_1+c_2/(1+r)+⋯+c_T/(1+r)^(T-1) +b_T/(1+r)^(T-1)…show more content…
Though the use of some weighed utilities for different generations is possible, the problem here is that, what should be the weights and how should it be assigned. As a result, it is not clear how should one evaluate social welfare. One could take a weighted some of the utilities of different generations, but then the question is what should be the weights? An alternate problem identified in such model is based on the assumption that, the present youthful generation necessarily save for retirement, which is true. Nonetheless, more savings by individuals with time lowers interest rate, which will in turn discourage savings. Thus if certain alternatives that enables consumption at retirement is possible, such as social security contributions, such problem could be reduced. Also, most people in developing economies upon retirement seem to depend on their active youths for upkeep. This kind of relationship seems lacking in all the two period consumption model. Lastly, these models do not capture some additional reasons why people may save such as that of the bequest motive as some older generations would care for their younger
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