Revisiting the Effect of Household Size on Consumption Over the Life-Cycle

Although the link between household size and consumption has a strong empirical support, there is no consistent way in which demographics are dealt with in standard life-cycle models. We study the relationship between the predictions of the Single Agent model (the standard in the literature) versus a simple model extension where deterministic changes in household size and composition affect optimal consumption decisions. We provide theoretical results comparing both approaches and quantify the differences in predictions across models.