| In this paper, we explore whether a standard life cycle model in which households purchase nondurable consumption and housing and face idiosyncratic income and mortality risk as well as endogenous borrowing constraints, enriched with several new components, like habit formation in housing, increasing leisure with retirement, stochastic health shocks, can account for key patterns of consumption, housing and asset holdings over the life cycle. First, consumption expenditures on non-housing consumption are hump-shaped. Second, the housing profile first increases monotonically and then flattens out. Third, the household accumulates wealth until age 70s and then does not liquidate his wealth much until he dies. Fourth, as shown by Aguiar and Hurst, neither the quality nor the quantity of food intake deteriorates with retirement status, although food expenditures decrease dramatically. We develop a life-cycle model that explicitly incorporates the dual feature of housing as both a consumption good and an investment asset. Our analysis indicates that transaction costs in house trading are essential to explain the home ownership patterns in the data. The increase in leisure due to retirement helps to explain the non-deaccumulation in housing and wealth for the elderly people. Moreover, the composite of consumption goods bought from the market and consumption goods prepared at home, does not decrease with retirement. Stochastic health shocks and medical costs also help to explain the non-deaccumulation of housing and wealth for the elderly. Habit formation in housing brings some of the statistics closer to the data. The household acquires less housing and more consumption at each age with habit formation. Habit formation helps to explain the flat housing profile for the elderly but it still does not explain the wealth profile of the elderly. We thus conclude that a standard model with transaction costs in house trading should be enhanced with key features like leisure and health shocks to explain the key patterns in the data. |
