by Margherita Borella, Elsa Fornero, Mariacristina Rossi; WP CeRP 62/07
(revised version January 2008)
This paper aims at detecting whether Italian households exhibit excess sensitivity in their consumption with regard to “severance pay”, a sizable, expected lump sum that workers receive at either retirement or whenever they leave their job for whatever reason.
One of the implications of the life-cycle hypothesis is that consumption does not react when expected income changes are realized, as these are already incorporated by consumers into their (intertemporal) budget constraint. Should consumers exhibit a reaction to anticipated income changes this would be in contrast to one of the main implications of the life cycle hypothesis.
Our analysis exploits a rotating panel data set of Italian households, the Survey of Household Income and Wealth (SHIW), for the years starting from 1989 to 2004. By using an Euler equation approach on different categories of consumption we estimate whether close to retirement households exhibit excess sensitivity of consumption with respect to severance pay.
Our findings suggest that households do not alter their non-durable goods consumption while they increase their durable consumption in the year when they cash their severance pay.