The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Permanent-Income Hypothesis

  • Mark Aguiar
  • Erik Hurst
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2801

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.

Keywords

Buffer stocks Consumption insurance Euler equations Impatience Liquidity constraints Marginal utility of consumption Martingales Permanent income hypothesis Precautionary wealth Preferences Retirement Retirement consumption puzzle Uncertainty 

JEL Classifications

D4 D10 
This is a preview of subscription content, log in to check access.

Bibliography

  1. Aguiar, M., and E. Hurst. 2005. Consumption vs. expenditure. Journal of Political Economy 113: 919–948.CrossRefGoogle Scholar
  2. Aguiar, M., and E. Hurst. 2007. Lifecycle prices and production. American Economic Review 97(5): 1533–1559.CrossRefGoogle Scholar
  3. Attanasio, O., and M. Browning. 1995. Consumption over the life cycle and over the business cycle. American Economic Review 85: 1118–1137.Google Scholar
  4. 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.CrossRefGoogle Scholar
  5. 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.Google Scholar
  6. Becker, G. 1965. A theory of the allocation of time. Economic Journal 75: 493–508.CrossRefGoogle Scholar
  7. 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.CrossRefGoogle Scholar
  8. Browning, M., and D. Collado. 2001. The response of expenditures to anticipated income changes: Panel data estimates. American Economic Review 91: 681–692.CrossRefGoogle Scholar
  9. Carroll, C. 2001. A theory of the consumption function, with and without liquidity constraints. Journal of Economic Perspectives 15: 23–45.CrossRefGoogle Scholar
  10. Cochrane, J. 1991. A simple test of consumption insurance. Journal of Political Economy 99: 957–976.CrossRefGoogle Scholar
  11. Friedman, M. 1957. A theory of the consumption function. Princeton: Princeton University Press.Google Scholar
  12. Gourinchas, P.-O., and J. Parker. 2002. Consumption over the life-cycle. Econometrica 70: 47–89.CrossRefGoogle Scholar
  13. Hall, R. 1978. Stochastic implications of the life cycle-permanent income hypothesis: theory and evidence. Journal of Political Economy 86: 971–987.CrossRefGoogle Scholar
  14. Hsieh, C.-T. 2003. Do consumers react to anticipated income changes? Evidence from the Alaska permanent fund. American Economic Review 93: 397–405.CrossRefGoogle Scholar
  15. 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.Google Scholar
  16. Parker, J. 1999. The reaction of household consumption to predictable changes in payroll tax rates. American Economic Review 89: 959–973.CrossRefGoogle Scholar
  17. Shea, J. 1995. Union contracts and the life-cycle/permanent income hypothesis. American Economic Review 85: 186–200.Google Scholar
  18. Souleles, N. 1999. The response of household consumption to income tax refunds. American Economic Review 89: 947–958.CrossRefGoogle Scholar
  19. Townsend, R. 1994. Risk and insurance in village India. Econometrica 62: 539–591.CrossRefGoogle Scholar
  20. Zeldes, S. 1989. Consumption and liquidity constraints: An empirical investigation. Journal of Political Economy 97: 305–346.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Mark Aguiar
    • 1
  • Erik Hurst
    • 1
  1. 1.