Life-cycle theories emphasize the fact that consumption is allocated intertemporally, on the basis of a long-term concept of resources that differs from household income. Because life-cycle income is unobserved, the distribution of this variable cannot be recovered. It is shown that, within a suitably defined class, a predictor of life-cycle income based on household income and expenditure entails a distribution dominated in a social welfare sense by the distribution of life-cycle incomes. A predictor constructed from socio-demographic variables induces a distribution that welfare-dominates the distribution of life-cycle incomes.
- precautionary savings
- income distributions