Subjective mortality hazard shocks and the adjustment of consumption expenditures JOB MARKET PAPER

This paper analyzes the adjustment of consumption expenditures if the subjective mortality hazard increases after a shock. The life-cycle model with mortality risk implies an upward adjustment of consumption expenditures as a response to such a shock. I use data from the Survey of Health, Ageing and Retirement in Europe (SHARE) to test this implication. In each survey wave, the mortality hazard measure is based on the response to a question on subjective survival probability. The e¤ect of the subjective hazard is identi…ed by using the death of a sibling as instrument. The estimation results indicate that the consumption expenditures are adjusted upwards after the hazard shock among those who have positive wealth holdings and are thus not liquidity constrained. Keywords: consumption decisions, subjective longevity, IV estimation JEL classi…cation: C26, D81, D91, J14