Estimating and testing intertemporal preferences: a unified framework for consumption, work and savings

William HawkLee Chin

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This dissertation contributes to the theory of intertemporal duality. A Frisch demand system derived from a consumer profit function is developed rationalizing consumption, labor supply and savings choices of households consistent with intertemporal maximization. A new functional form with many appealing properties is introduced. This functional form has the generality of rank 3 demand systems and additionally has the property that the conditioning variable of Frisch demand systems, the unobserved price of marginal utility, is solved explicitly via the inversion of the intertemporal budget constraint. This new functional from is applied to selected single headed households over a five year span using information from five waves of the Panel Study of Income Dynamics (PSID) from 1985 to 1989. Household wealth from the beginning and end of this period, together with income information over this observed period is used to derive aggregate household consumption. The connection between commonly maintained primal separability restrictions and the full matrix of price cross price Frisch elasticites is demonstrated. A test of consumption-labor and time separability suggests that these restrictions ought to be rejected. Cross price Frisch elasticities are found not to equal zero and this in turn affects all estimates of consumption, labor supply and saving elasticities.

Date: 2005-01-01
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