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Estimating Discount Functions with Consumption Choices over the Lifecycle

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  • David Laibson
  • Andrea Repetto
  • Jeremy Tobacman

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%.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13314.

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Date of creation: Aug 2007
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Handle: RePEc:nbr:nberwo:13314

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