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Are Predicted Lifetime Consumption Profiles Robust with respect to Model Specifications?

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    Abstract

    Structural models of lifetime labour supply and consumption require functional specifications of preferences as well as other assumptions that can be difficult to assess a priori. Misspecifications of the model might lead to biases in the estimates of preferences, that may influence the simulation results obtained from the model. In this paper we study to what extent predicted distributions of lifetime consumption are robust with respect to the specification of preferences. The simulation results show that simulated distributions of lifetime consumption strongly depend on the estimate of the intertemporal substitution rate as well as on the estimate of the time preference rate relative to the marginal interest rate net of taxes.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp308.pdf
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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 308.

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    Date of creation: Aug 2001
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    Handle: RePEc:ssb:dispap:308

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    Keywords: Lifetime preferences; life cycle consumption; testing modelspesifications; empirical models.;

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    1. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
    2. MaCurdy, Thomas E, 1983. "A Simple Scheme for Estimating an Intertemporal Model of Labor Supply and Consumption in the Presence of Taxes and Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 265-89, June.
    3. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
    4. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, vol. 77(4), pages 630-46, September.
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