Intertemporal Consumption

Please note that the content of this book primarily consists of articles available from Wikipedia or other free sources online. Economic theories of intertemporal consumption seek to explain people's preferences in relation to consumption and saving over the course of their life. The earliest work on the subject was by Irving Fisher and Roy Harrod who described 'hump saving', hypothesizing that savings would be highest in the middle years of a person's life as they saved for retirement. In the 1950s, more well-defined models built on discounted utility theory and approached the question of inter-temporal consumption as a lifetime income optimization problem. Solving this problem mathematically, assuming that individuals are rational and have access to complete markets, Modigliani & Brumberg, Albert Ando, and Milton Friedman developed what became known as the life-cycle model. This model predicts that people consume an annuity of their expected lifetime income at all points in their life.