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Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations

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  • Kapteyn, A.
  • Kleinjans, K.
  • Soest, A.H.O. van

    (Tilburg University, Center for Economic Research)

Abstract

Euler equation estimation of intertemporal consumption models requires many, often unverifiable assumptions. These include assumptions on expectations and preferences. We aim at reducing some of these requirements by using direct subjective information on respondents’ preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature. The model favored by the data only requires cross-section data for estimation.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-85.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200885

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Keywords: Expectations; Consumption; Euler equations;

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Cited by:
  1. Binswanger, Johannes & Salm, Martin, 2013. "Does Everyone Use Probabilities? Intuitive and Rational Decisions about Stockholding," IZA Discussion Papers 7265, Institute for the Study of Labor (IZA).
  2. Maurizio Bovi, 2014. "Shocks and the Expectations Formation Process. A Tale of Two Expectations," Natural Field Experiments 00390, The Field Experiments Website.
  3. van Rooij, Maarten & Teppa, Federica, 2014. "Personal traits and individual choices: Taking action in economic and non-economic decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 100(C), pages 33-43.

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