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Estimating Discount Functions with Consumption Choices over the Lifecycle

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Author Info
David Laibson
Andrea Repetto
Jeremy Tobacman ()

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Abstract

Intertemporal preferences are difficult to measure. We estimate time preferences using a structural buffer stock consumption model and the Method of Simulated Moments. The model includes stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and discount functions that allow short-run and long-run discount rates to differ. Data on retirement wealth accumulation, credit card borrowing, and consumption-income comovement identify the model. Our benchmark estimates imply a 40% short-term annualized discount rate and a 4.3% long-term annualized discount rate. Almost all specifications reject the restriction to a constant discount rate. Our quantitative results are sensitive to assumptions about the return on illiquid assets and the coefficient of relative risk aversion. When we jointly estimate the coefficient of relative risk aversion and the discount function, the short-term discount rate is 15% and the long-term discount rate is 3.8%. JEL classi.cation: D91 (Intertemporal Consumer Choice; Lifecycle Models and Saving), E21 (Consumption; Saving).

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 236.

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Date of creation: 2007
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Handle: RePEc:edj:ceauch:236

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dean Karlan & Jonathan Zinman, 2007. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Working Papers 956, Economic Growth Center, Yale University. [Downloadable!]
    Other versions:
  2. Meier, Stephan & Sprenger, Charles, 2009. "Present-Biased Preferences and Credit Card Borrowing," IZA Discussion Papers 4198, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," Working Papers wp173, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
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  4. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2008. "How are Preferences Revealed?," NBER Working Papers 13976, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Wolfgang Pesendorfer, 2006. "Behavioral Economics Comes of Age," Levine's Bibliography 321307000000000038, UCLA Department of Economics. [Downloadable!]
  6. Wenli Li & Haiyong Liu & Rui Yao, 2009. "Housing over time and over the life cycle: a structural estimation," Working Papers 09-7, Federal Reserve Bank of Philadelphia. [Downloadable!]
  7. Jonathan Zinman, 2008. "Restricting consumer credit access: household survey evidence on effects around the Oregon rate cap," Working Papers 08-32, Federal Reserve Bank of Philadelphia. [Downloadable!]
  8. Demirguc-Kunt, Asli & Levine, Ross, 2009. "Finance and inequality : theory and evidence," Policy Research Working Paper Series 4967, The World Bank. [Downloadable!]
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