Lifecycle Consumption Under Different Income Profiles: Evidence and Theory∗

We report on a series of economic decision-making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles. We find that for every lifecycle income profile that we consider, subjects on average over-consume in the early periods of their lives and under-consume in later periods of their lives relative to the conditional optimum and that the particular income profile they face affects their lifetime utility despite the fact that all income profiles considered have the same present value. We conduct a specification search for a model to explain our data and find that a two-type model with one type consuming the conditional optimum and the other type consuming endowments provides a best fit to our data. We further show how a rational inattention model provides a micro-foundation for the two-type model and can better explain variations in subjects’ strategies and performance across treatments.