Understanding Consumption: What Interviews with Retired Households Can Reveal About Budgetary Decisions

This paper uses interview data from retired households to inform a discussion about economic models of consumption. It is divided into two parts. In the first part, the economic models are described. The paper then discusses several different types of reasons for finding them unhelpful in explaining consumption. The second part of the paper considers the role of 'middle range' theories in developing plausible models of household behaviour. Phenomena which the interviews suggest are important in explaining consumption, such as time allocation, the labour supply decision, the ubiquitous durability of goods and the structure of the household, are not typically supported by middle range theory in current models. Without the constraints of such theory, it is very hard to distinguish models providing genuine explanation from those that merely fit the data. The latter part of the paper also discusses aspects of a new middle range theory of consumption suggested by the interviews.