An intergenerational theory of the consumption function

Abstract

This thesis presents a theory of the consumption function called the 'Inter- Generational Hypothesis' (IGH). The theory starts from the premise that individuals derive utility not only from their own consumption, but also from the welfare of their offspring. Individuals are supposed to maximise an intergenerationally altruistic utility function subject to a lifetime budget constraint and so derive their optimal consumption and bequest plans. From these plans, it is possible to construct an individual's consumption function. This contains earnings and inheritance terms, and is non-linear in earnings; this is consistently aggregated over all living individuals to yield the aggregate IGH consumption function. A feature of this function is the rich set of intergenerational information hypotheses it is able to encompass; there are also several implications with respect to earnings redistribution policy. The IGH function is estimated using 23 years of post-war UK data, and tested against rival consumption models, including Hall's (1978) REPIH. The principal finding is that the data do not appear to be consistent with either model in their pure form; however, they support a hybrid consumption function where a proportion of the population behave according to the altruistic IGH, and where the rest behave according to the 'selfish' REPIH. An additional finding, necessarily tentative given the imperfections of the distributional data, is a failure to detect significant non-linearity in the aggregate consumption function. This result casts doubt on the usefulness of policies designed to redistribute incomes in order to affect aggregate consumption.