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Why Does Consumption Fluctuate in Old Age and How Should the Government Insure it?

Institute Working Paper 40 | Published October 23, 2020

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Authors

Richard Blundell University College London, IFS, and CEPR

Margherita Borella Università di Torino and CeRP-Collegio Carlo Alberto

Jeanne Commault Sciences Po

Why Does Consumption Fluctuate in Old Age and How Should the Government Insure it?

Abstract

In old age, consumption can fluctuate because of shocks to available resources and because health shocks affect utility from consumption. We find that even temporary drops in income and health are associated with drops in consumption and most of the effect of temporary drops in health on consumption stems from the reduction in the marginal utility from consumption that they generate. More precisely, after a health shock, richer households adjust their consumption of luxury goods because their utility of consuming them changes. Poorer households, instead, adjust both their necessary and luxury consumption because of changing resources and utility from consumption.