RATIONAL CONSUMERS*

What is it about?

The life cycle/permanent income hypothesis (LCPIH) entails two postulates: People have rational expectations and people do not have problems with self-control. If either or both of these postulates do not apply, we cannot obtain a testable implication for the LCPIH. We use Japanese representative panel data that include responses to self-reported and retrospective questions in order to elicit behavior such as forward-looking and self-control problems. We test the rational expectations hypothesis and the LCPIH implication and find that rational consumers do not change their expenditure in response to expected income changes, which we restrict to fit the two LCPIH postulates. 1.

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