Intertemporal Consumption and Savings Behavior: Neoclassical, Behavioral, and Neuroeconomic Approaches

This paper summarizes neoclassical, behavioral, and neuroeconomic models of intertemporal consumption and savings behavior. I summarize the construction and implications of Modigliani & Brumberg’s Life-Cycle Hypothesis [4] and Laibson’s quasi-hyperbolic consumption function [8] as background and motivation for Bisin & Benhabib’s neuroeconomic model of dynamic consumption behavior [3]. In particular, I focus on the mathematical construction of each model, their different behavioral assumptions of agent rationality, and the resulting implications for economic theory. 1 The Neoclassical Life-Cycle Hypothesis The development of modern economic theories analyzing intertemporal consumption began in the early 1950s with the publication of Modigliani & Brumberg’s Life-cycle Hypothesis (LCH) [4]. By making several arguably innocuous assumptions, Modigliani & Brumberg produce several important and non-trival predictions about macroeconomic processes such as the relationship in aggregate economics between savings and growth. Furthermore, since its construction, the LCH has served as the standard economic approach to the study of consumption and savings behavior and has served as a foundational basis for subsequent models of intertemporal consumption. The structure of the rest of this chapter is as follows: subsection 1.1 presents the theoretical foundations and assumptions of the LCH. Subsection 1.2 discusses some of the implications and results. Subsection 1.3 concludes the discussion on neoclassical models of intertemporal consumption and discusses several objections and limitations of the LCH.