Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations
Dornsife Center for Economic and Social Research - University of Southern California; Institute for the Study of Labor (IZA)
Kristin J. Kleinjans
California State University, Fullerton - Department of Economics
Arthur van Soest
Tilburg University; Netspar; RAND Corporation; Institute for the Study of Labor (IZA)
October 7, 2008
CentER Discussion Paper Series No. 2008-85
Euler equation estimation of intertemporal consumption models requires many, often unverifiable assumptions. These include assumptions on expectations and preferences. We aim at reducing some of these requirements by using direct subjective information on respondents' 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. The model favored by the data only requires cross-section data for estimation.
Number of Pages in PDF File: 30
Keywords: Expectations, Consumption, Euler equations
JEL Classification: D91, D84, D12
Date posted: October 8, 2008 ; Last revised: August 26, 2010
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