Estimating Life-Cycle Parameters from Consumption Behavior at Retirement

Using pseudo-panel data, we estimate the structuralparameters of a life--cycle consumption model with discrete laborsupply choice. A focus of our analysis is the abrupt drop inconsumption upon retirement for a typical household. Theliterature sometimes refers to the drop, which in the U.S.Consumer Expenditure Survey we estimate to be approximately 16%,as the "retirement--consumption puzzle." Although a downwardstep in consumption at retirement contradicts predictions fromlife--cycle models with additively separable consumption andleisure, or with continuous work-hour options, a consumption jumpis consistent with a setup having nonseparable preferences overconsumption and leisure and requiring discrete work choices. Thispaper specifies a life--cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption atretirement to provide an advantageous method of identifyingstructural parameters --- most importantly, the intertemporalelasticity of substitution