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Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations

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  • Arie Kapteyn
  • Kristin J. Kleinjans
  • Arthur Van Soest

Abstract

Euler equation estimation of intertemporal consumption models imposes heavy demands on data and identifiability conditions. For example, one typically needs panel data on consumption, assumptions on expectations, and a parameterization of preferences. The authors aim at reducing some of these requirements, by using additional information on respondentsÕ 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.

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File URL: http://www.rand.org/content/dam/rand/pubs/working_papers/2007/RAND_WR535.pdf
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Bibliographic Info

Paper provided by RAND Corporation Publications Department in its series Working Papers with number 535.

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Length: 29 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:ran:wpaper:535

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Keywords: Expectations; consumption; Euler equations;

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References

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Cited by:
  1. Maurizio Bovi, 2014. "Shocks and the Expectations Formation Process. A Tale of Two Expectations," Natural Field Experiments 00390, The Field Experiments Website.
  2. 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).

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