Modigliani and Brumberg’s life-cycle theory of saving (1954) (and the similar permanent income hypothesis by Milton Friedman [1957]) is a classic example of economic theorizing. The life-cycle (LC) model makes some simplifying assumptions in order to be able to characterize a well-defined optimization problem, which is then solved. The solution to that optimization problem provides the core of the theory.

Attempts to test the LC hypothesis have met with mixed success. As summarized by Courant, Gramlich, and Laitner (1984), “But for all its elegance and rationality, the life-cycle model has not tested out very well. … Nor have efforts to

EP - 330 PB - Russell Sage Foundation PY - 1992 SN - 9780871545589 SP - 287 T2 - Choice Over Time UR - http://www.jstor.org/stable/10.7758/9781610443654.16 Y2 - 2021/03/02/ ER -