Life - cycle expenditure allocations and the consumption costs of children *

In this paper we assess whether it is changing needs or intertemporal substitution that dominate household expenditure responses to the presence of children over the life-cycle. We construct lifetime expenditure paths for households with different demographic proliles and consider the shape of these paths and some possible implications for welfare measures. Simulated expenditure paths based on consistent single-period and multi-period models indicate that it is indeed changing needs that dominate such paths in periods when children are present in the household. However, allowing for intertemporal substitution is still shown to be important since it can introduce new information relevant to the calculation of household welfare.