Estimating Temptation and Commitment Over The Life‐cycle
Research output: Contribution to journal › Journal article › Research › peer-review
Documents
- KovacsLowMoran2020
Submitted manuscript, 574 KB, PDF document
- iere.12491
Final published version, 379 KB, PDF document
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.
Original language | English |
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Journal | International Economic Review |
Volume | 62 |
Issue number | 1 |
Pages (from-to) | 101-139 |
ISSN | 0020-6598 |
DOIs | |
Publication status | Published - 2021 |
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