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How Does Future Income Affect Current Consumption?

Christopher D. Carroll
The Quarterly Journal of Economics
Vol. 109, No. 1 (Feb., 1994), pp. 111-147
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2118430
Page Count: 37
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How Does Future Income Affect Current Consumption?
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Abstract

This paper tests a straightforward implication of the basic Life Cycle model of consumption: that current consumption depends on expected lifetime income. The paper projects future income for a panel of households and finds that consumption is closely related to projected current income, but unrelated to predictable changes in income. However, future income uncertainty has an important effect: consumers facing greater income uncertainty consume less. The results are consistent with "buffer-stock" models of consumption like those of Deaton [1991] or Carroll [1992a, 1992b], where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income.

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