The life cycle hypothesis and consumption inequality

The life-cycle hypothesis predicts that the cross-sectional variance of the marginal utility of consumption is equal to its own lag plus a constant and a random component. Using fairly general preference specifications and some assumptions about the nature of the random component, we provide an explicit test of this hypothesis. Our approach, unlike Deaton and Paxson's (1994) analysis, circumvents the necessity to identify a pure age profile of the cross sectional variance of consumption and yields a well specified statistical test. This test is applied to data from the United States, the United Kingdom and Italy. The results do not reject the restrictions implied by the theoretical model.