The dynamics of individual and household behavior



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This dissertation uses dynamic models of labor supply and consumption to study the behavior of individuals and households. The first chapter examines the impact of income and wage volatility on life-cycle labor supply patterns. With uncertainty in the model, labor supply dynamics should depend on wage changes and rates of time preference (as in the deterministic case); additionally, on the amount of uncertainty facing the individual, current assets, risk-aversion, time to retirement, and a “prudence” motive. I estimate this model and standard approaches using data on male household heads in the Panel Study of Income Dynamics (PSID). Both techniques yield similar estimates of the wage elasticity, but the standard approach substantially overstates patience. Wage volatility and assets both affect labor supply dynamics, as predicted by my model. The second chapter develops ways of studying the dynamics of household decision-making. The existing literature on joint decision-making examines static bargaining problems. I find several ways to model the multi-period allocation problem: as a repeated static game, as a multi-period game with full commitment, and as a multi-period game without commitment. These models imply different behavior. I propose a test for each intertemporal procedure. Using data on household expenditures in the PSID, I find that I can reject that a single model describes behavior of all households. I allow the data to sort households into the model that best describes their behavior. Children, divorce laws, and length of marriage are determinants of the intertemporal procedure. The final chapter examines consumption dynamics under uncertainty. Controlling for volatility in prices, income, and the interest rate, I distinguish between responses to anticipated and unanticipated income. Consistent with the stochastic life-cycle model, there is no relationship between changes in consumption and anticipated future income; however, consumption responds to unanticipated income. In contrast to the predictions of the model, consumption is roughly twice as responsive to anticipated price changes as to unanticipated price changes.