Abstract
The permanent income hypothesis (PIH) is a theory that links an individual’s consumption at any point in time to that individual’s total income earned over his or her lifetime. The hypothesis is based on two simple premises: (1) that individuals wish to equate their expected marginal utility of consumption across time and (2) that individuals are able to respond to income changes by saving and dis-saving. In this article we present the intuition and empirical implications of the PIH in several standard contexts.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Bibliography
Aguiar, M., and E. Hurst. 2005. Consumption vs. expenditure. Journal of Political Economy 113: 919–948.
Aguiar, M., and E. Hurst. 2007. Lifecycle prices and production. American Economic Review 97(5): 1533–1559.
Attanasio, O., and M. Browning. 1995. Consumption over the life cycle and over the business cycle. American Economic Review 85: 1118–1137.
Attanasio, O.P., and G. Weber. 1995. Is consumption growth consistent with intertemporal optimization? Evidence from the consumer expenditure survey. Journal of Political Economy 103: 1121–1157.
Attanasio, O., J. Banks, C. Meghir, and G. Weber. 1999. Humps and bumps in lifetime consumption. Journal of Business and Economic Statistics 17: 22–35.
Becker, G. 1965. A theory of the allocation of time. Economic Journal 75: 493–508.
Bernheim, B.D., J. Skinner, and S. Weinberg. 2001. What accounts for the variation in retirement wealth among U.S. households? American Economic Review 91: 832–857.
Browning, M., and D. Collado. 2001. The response of expenditures to anticipated income changes: Panel data estimates. American Economic Review 91: 681–692.
Carroll, C. 2001. A theory of the consumption function, with and without liquidity constraints. Journal of Economic Perspectives 15: 23–45.
Cochrane, J. 1991. A simple test of consumption insurance. Journal of Political Economy 99: 957–976.
Friedman, M. 1957. A theory of the consumption function. Princeton: Princeton University Press.
Gourinchas, P.-O., and J. Parker. 2002. Consumption over the life-cycle. Econometrica 70: 47–89.
Hall, R. 1978. Stochastic implications of the life cycle-permanent income hypothesis: theory and evidence. Journal of Political Economy 86: 971–987.
Hsieh, C.-T. 2003. Do consumers react to anticipated income changes? Evidence from the Alaska permanent fund. American Economic Review 93: 397–405.
Modigliani, F., and R. Brumberg. 1954. Utility analysis and the consumption function: An interpretation of the cross section data. In Post-Keynesian economics, ed. K. Kurihara. New Brunswick: Rutgers University Press.
Parker, J. 1999. The reaction of household consumption to predictable changes in payroll tax rates. American Economic Review 89: 959–973.
Shea, J. 1995. Union contracts and the life-cycle/permanent income hypothesis. American Economic Review 85: 186–200.
Souleles, N. 1999. The response of household consumption to income tax refunds. American Economic Review 89: 947–958.
Townsend, R. 1994. Risk and insurance in village India. Econometrica 62: 539–591.
Zeldes, S. 1989. Consumption and liquidity constraints: An empirical investigation. Journal of Political Economy 97: 305–346.
Author information
Authors and Affiliations
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Aguiar, M., Hurst, E. (2018). Permanent-Income Hypothesis. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2801
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_2801
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences