ESTIMATING TEMPTATION AND COMMITMENT OVER THE LIFE CYCLE

Agnes Kovacs, Hamish Low and Patrick Moran

International Economic Review, 2021, vol. 62, issue 1, 101-139

Abstract: This article 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): 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.

Date: 2021
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Citations: View citations in EconPapers (4)

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https://doi.org/10.1111/iere.12491

Related works:
Working Paper: Estimating temptation and commitment over the life-cycle (2020)
Working Paper: Estimating Temptation and Commitment Over the Life-Cycle (2020)
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