Life Cycle Hypothesis - LCH

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Definition: Life Cycle Hypothesis - LCH

It is defined as a theory which indicates that individual plans his or her consumption and savings as a percentage of their anticipated life cycle income. This theory was developed by Franco Modigliani and his protégé Richard Brumberg. This theory states that marginal propensity to consume is higher in young and old individuals as they are anticipating future income while middle age people have a greater propensity to save.

The LCH theory is exactly opposite to what Keynesian function of consumption. The Keynesian theory is focused on current income of the individuals while LCH focuses on a percentage of lifetime income. According to LCH theory the individual’s consumption behaviour is determined by the tastes, income and preferences of the individual.

The LCH takes a microeconomic view of the consumption function. It says that any individual has two goals regarding his spending. Either people spend more than their income because they prefer a better standard of living than the rest of the people or else they try to maintain a constant standard of living throughout their lives. This is the main premise behind the LCH which says that only income doesn’t govern an individual’s spending. The tastes and preferences of the individual are equally important.



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