Life-Cycle Hypothesis

Discipline: Economics

Comprising the analysis of individual consumption patterns, life cycle hypothesis was developed by American economist Irving Fisher (1867-1947) and English economist Roy Harrod (1900-1978), before later being extended by Japanese economist ALBERT ANDO (1929-2001) and Italian-born economist Franco Modigliani (1918-2003).

Life-cycle hypothesis assumes that individuals consume a constant percentage of the present value of their life income. This is dictated by preferences and tastes and income.

ANDO and Modigliani argued that the average propensity to consume is higher in young and old households, whose members are either borrowing against future income or running down life-savings.

Middle-aged people tend to have higher incomes with lower propensities to consume and higher propensities to save.

Also see: forced saving

A Ando and F Modigliani, 'Tests of the Life Cycle Hypothesis of Saving: Comments and Suggestions', Oxford Institute of Statistics Bulletin, vol. xix (May, 1957), 99-124


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