Are assets fungible? Testing the behavioral theory of life-cycle savings

This paper is an empirical investigation of the behavioral life-cycle savings model. This model posits that self-control problems causes individuals to depart substantially from rational behavior. I show that this model can explain how the consumption of individuals at or near retirement vary with changes in different types of financial assets. Specifically, consumption spending is sensitive to changes in income and in liquid assets, but not very sensitive to changes in the value of other types of assets such as houses and social security (even though the value of non-liquid assets is relatively large for most of the households in the sample). In general, the evidence presented here favors the Behavioral Life-Cycle Model over the conventional life-cycle model even when liquidity constraints are introduced. # 1998 Elsevier Science B.V. All rights reserved JEL classi®cation: D91: Intertemporal consumer choice; Life-cycle models and savings; E21: Consumption; Savings