Estimating Temptation and Commitment Over the Life-Cycle

Hamish Low and Agnes Kovacs
Authors registered in the RePEc Author Service: Patrick Moran

No 796, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper estimates the importance of temptation (Gul and Pesendorfer, 2001) for consumption smoothing and asset accumulation in a structural life-cycle model. We use two complementary estimation strategies: ï¬ rst, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We ï¬ nd that the utility cost of temptation is one-quarter of the utility beneï¬ t of consumption. Further, we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution: estimates of the EIS are substantially higher than without temptation. Finally, our Method of Simulated Moments estimation is able to match well the life-cycle accumulation proï¬ les for both liquid and illiquid wealth only if temptation is part of the preference speciï¬ cation. Our ï¬ ndings on the importance of temptation are robust to the different estimation strategies. RevisedJuly 2020

Keywords: life-cycle; temptation preferences; housing; estimating Euler equations (search for similar items in EconPapers)
JEL-codes: D12 D91 E21 G11 R21 (search for similar items in EconPapers)
Date: 2020-07-22
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: ESTIMATING TEMPTATION AND COMMITMENT OVER THE LIFE CYCLE (2021)
Working Paper: Estimating temptation and commitment over the life-cycle (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:796

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