Estimating Temptation and Commitment Over The Life‐cycle

Publikation: Bidrag til tidsskriftTidsskriftartikelfagfællebedømt

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This paper estimates the importance of temptation for consumption smoothing and asset accumulation in a life‐cycle model. We use two complementary estimation strategies: first, we estimate the model‐implied Euler equation; second, we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. In both cases, we find that the utility cost of temptation is one‐quarter of the utility benefit of consumption. Further, temptation is crucial for correctly estimating the elasticity of intertemporal substitution: EIS estimates are biased downward when ignoring temptation. Finally, the model only matches the share of illiquid wealth if temptation is in the preference specification.
OriginalsprogEngelsk
TidsskriftInternational Economic Review
Vol/bind62
Udgave nummer1
Sider (fra-til)101-139
ISSN0020-6598
DOI
StatusUdgivet - 2021

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