DP1251 The Age-Wealth Profile and the Life-Cycle Hypothesis: A Cohort Analysis with a Time Series of Cross-Sections of Italian Households

Author(s):	Tullio Jappelli
Publication Date:	October 1995
Keyword(s):	Life-cycle Model, Repeated Cross-sections, Wealth Accumulation
JEL(s):	E21
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1251

Existing estimates of the age-wealth profile use panel or cross-sectional data. Panels with wealth data are rare, and plagued by measurement errors and sample attrition. Cross-sectional data require strong identifying assumptions. This paper represents the first attempt to use repeated cross-sectional data to test one of the central implications of the life-cycle theory, i.e. the extent to which the elderly run down accumulated assets. Using the 1984-93 Italian Survey of Household Income and Wealth, the paper shows that failing to control for the influence of cohort effects leads to substantial bias in the estimate of the age-wealth profile. Once cohort effects are taken into account, the results indicate that households accumulate assets until they are 70 years old; afterwards the estimated average annual rate of wealth decumulation is about 6%. A basic prediction of the life-cycle model, that the cohort effect increases from older to younger cohorts, is strongly supported by the data. The results also uncover considerable population heterogeneity: the rates of wealth decumulation are much lower for rich households and households headed by individuals with higher education.