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Estimating Intertemporal Allocation Parameters using Synthetic Residual Estimation

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  • Sule Alan
  • Martin Browning

Abstract

We present a novel structural estimation procedure for models of intertemporal allocation. This is based on modelling expectations errors directly; we refer to it as synthetic residual estimation (SRE). The flexibility of SRE allows us to account for measurement error in consumption and for heterogeneity in intertemporal allocation parameters. An investigation of the small sample properties of the SRE estimator indicates that it dominates generalized method of moments (GMM) estimation of both exact and approximate Euler equations in the case when we have short panels and noisy consumption data. We apply SRE to two panels drawn from the Panel Study of Income Dynamics (PSID) and estimate the joint distribution of the discount factor and the elasticity of intertemporal substitution. We reject strongly homogeneity of the discount factor and the elasticity of intertemporal substitution. We find that, on average, the more educated are more patient and less willing to substitute intertemporally than the less educated. Within education strata, patience and willingness to substitute are positively correlated. Copyright , Wiley-Blackwell.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 77 (2010)
Issue (Month): 4 ()
Pages: 1231-1261

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Handle: RePEc:oup:restud:v:77:y:2010:i:4:p:1231-1261

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Cited by:
  1. Rehme, Günther, 2014. "Endogenous (re-)distributive policies and economic growth: A comparative static analysis," Economic Modelling, Elsevier, Elsevier, vol. 40(C), pages 355-366.
  2. Hamish Low & Luigi Pistaferri, 2014. "Disability Insurance and the Dynamics of the Incentive-Insurance Tradeoff," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1420, Faculty of Economics, University of Cambridge.
  3. Christian Chiglino & Nicole Tabasso, 2014. "Risk Aversion in a Model of Endogenous Growth," School of Economics Discussion Papers, School of Economics, University of Surrey 0314, School of Economics, University of Surrey.
  4. Gang Sun, . "Consumption Inequality and Discount Rate Heterogeneity," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201318, Department of Economics, University of St. Andrews.
  5. Gang Sun, 2012. "Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201317, Department of Economics, University of St. Andrews, revised 26 Feb 2013.
  6. Jørgensen, Thomas H., 2013. "Structural estimation of continuous choice models: Evaluating the EGM and MPEC," Economics Letters, Elsevier, Elsevier, vol. 119(3), pages 287-290.
  7. Theodoros M. Diasakos, . "Comparative Statics of Asset Prices: the effect of other assets' risk," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201315, Department of Economics, University of St. Andrews, revised 08 Jan 2014.

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