Durable Purchases over the Later Life Cycle
| Author | Thomas F. Crossley,Martin Browning,Melanie Lührmann |
| Published date | 01 April 2016 |
| DOI | http://doi.org/10.1111/obes.12085 |
| Date | 01 April 2016 |
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©2014 TheAuthors. OxfordBulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
Thisis an open access article under the ter ms of the CreativeCommons Attribution License, which permits use, distribution and reproduction in any medium, provided
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OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 78, 2 (2016) 0305–9049
doi: 10.1111/obes.12085
Durable Purchases over the Later Life Cycle*
Martin Browning†,‡, Thomas F. Crossley§,‡ and Melanie
L¨
uhrmann¶,‡
†Department of Economics, University of Oxford, Oxford, OX1 3UQ, UK
(e-mail: martin.browning@economics.ox.ac.uk)
‡Institute for Fiscal Studies, 7 Ridgmount Street, London, WC1E 7AE, UK
§Department of Economics, University of Essex, Colchester, CO4 3SQ, UK
(e-mail: tcross@essex.ac.uk)
¶Department of Economics, Royal Holloway, University of London, Egham, TW20 0EX, UK
(e-mail: melanie.luhrmann@rhul.ac.uk)
Abstract
We investigate life-cycle patterns of demand for services from household durables using
UK panel data. We take careful account of prices, demographics, labour supply and health.
Demand for consumer electronics rises with age, while the demand for household appli-
ances is flat. These findings contrast with the well documented decline in non-durable
consumption at older ages, and suggest that studies that estimate the overall discount rate
from nondurable consumption may underestimate consumer patience and the savings re-
quired to fund retirement. We also find important non-separabilities between the demand
for durables, labour supply and health status.
I. Introduction
There is a large empirical literature which documents life-cycle patterns of household
consumption or expenditure, particularly as households move into later life. It has been
almost entirely concerned with life-cycle patterns of non-durable consumption while life-
cycle patterns of durable, non-housing consumption have been little studied. In this paper,
we address this important gap in the literature.
Life-cycle patterns of consumption are of interest for a number of reasons. First, the life-
cycle model developed byModigliani, and its many modern descendants, form the basis for
much economic analysis, in public finance, macroeconomics and other areas. This class of
models suggests that households should pursue smooth consumption paths. Thus, a failure
to smooth consumption between, for example, workinglife and retirement, would represent
a key challenge to the life-cycle framework. Second, falls in consumption in later life
represent not just a challenge to an important economic model, but potentially significant
JEL Classification numbers: D12, D91
*Financial support from the ESRC grant ES/F019092/1, the EU RTN Microdata Methods and Practice and the
ESRC-funded Centre for Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (CPP, refer-
ence RES-544-28-5001) is gratefully acknowledged. The authors thank the editor and twoanonymous referees and
participants in a number of seminars and conferences for helpful comments.
146 Bulletin
welfare losses. If the combination of current public policies and private preparations do not
allow households to maintain an appropriate standard of livingin retirement, this is a matter
of considerable policy concern. Finally, as populations throughout the developedworld are
rapidly ageing, forecasting future demand patterns necessarily requires an understanding
of age effects on both the level of total spending and the allocation of that spending across
different goods and services.
The literature on non-durable consumption documents a drop in later life, and partic-
ularly at retirement entry (see, e.g., Miniaci, Monfardini and Weber, 2003; Smith, 2006;
Battistin et al., 2009; L¨uhrmann, 2010). The general decline in non-durable consumption in
later life is sometimes attributed to consumer impatience (Gourinchas and Parker, 2002),
while the sharper drop at retirement has been explained by increased home production
and the cessation of work-related expenses (Banks, Blundell andTanner, 1998; Aguiar and
Hurst, 2005). There is also a well-developed literature on life-cycle patterns of housing ar-
rangements, and in particular, the degree of ‘downsizing’in later life (see, e.g., Banks et al.,
2010; Chiuri and Jappelli, 2010). Housing is a very important durable, but it is also unusual
in a number of respects, most notably because it combines features of a consumption good
with those of an asset.
In contrast to the literatures on non-durable consumption and housing, life-cycle pat-
terns of durable, non-housing consumption have been little studied. Durable, non-housing
consumption is an important component of total household expenditure. Durables and
semi-durables (including clothing) account on average for about 25% of total non-housing
consumer spending of those above age 40.1Expenditures on non-housing durables have
been shown to behave quite differently from non-durable expenditures at higher frequen-
cies; see Browning and Crossley (2009).At life-cycle frequencies, the presence of a ‘pure’
age effect for durableswould entail revision of calculations on how much households should
be saving for retirement, and a reassessment of studies of non-durable consumption. For
example, if in later life, the taste for durables is declining at a faster rate than for non-durable
goods, then households will not need to save as much for retirement as would be implied
by the time path of non-durables demands and the assumption that relative preferences for
different categories of goods are constant. On the other hand, if tastes for durables decline
more slowly (or even rise) with age, retirement needs must be revised upwards. Moreover,
in this case, less consumer impatience is necessary to reconcile the data with the life-cycle
model, and studies based on non-durable expenditure will only have overestimated the
overall discount rate (because they attribute a decline in non-durable spending to over-
all impatience, rather than to a relative preference for durables that increases with age).
Thus the lack of studies of the pattern of durable, non-housing expenditure at life-cycle
frequencies is an important gap in the literature.
Weemploy longitudinal data on households’spending on durable goods from the British
Household Panel Study (BHPS) between 1997 and 2008 to study life-cycle patterns of
durables demands. We focus on two specific categories of durables for which we have
good data: white goods or appliances (freezers, microwaves, dishwashers, washing ma-
chines and tumble dryers), and consumer electronics (personal computers, CD players,
TVs, VCRs, phones, cable TV and satellite dishes). For the reasons just outlined, we shall
1Authors’ owncalculations based on the UK Expenditure and Food Survey.
©2014 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and JohnWiley & Sons Ltd.
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