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Estimating Temptation and Commitment Over the Life-Cycle

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  • Hamish Low
  • Agnes Kovacs

Abstract

This paper estimates the importance of temptation (Gul and Pesendorfer, 2001) for consumption smoothing and asset accumulation in a structural life-cycle model. We use two complementary estimation strategies: ï¬ rst, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We ï¬ nd that the utility cost of temptation is one-quarter of the utility beneï¬ t of consumption. Further, we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution: estimates of the EIS are substantially higher than without temptation. Finally, our Method of Simulated Moments estimation is able to match well the life-cycle accumulation proï¬ les for both liquid and illiquid wealth only if temptation is part of the preference speciï¬ cation. Our ï¬ ndings on the importance of temptation are robust to the different estimation strategies. RevisedJuly 2020

Suggested Citation

  • Hamish Low & Agnes Kovacs, 2020. "Estimating Temptation and Commitment Over the Life-Cycle," Economics Series Working Papers 796, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:796
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    More about this item

    Keywords

    life-cycle; temptation preferences; housing; estimating Euler equations;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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