Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations

CentER Discussion Paper Series No. 2008-85

30 Pages Posted: 8 Oct 2008 Last revised: 26 Aug 2010

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California; IZA Institute of Labor Economics

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)

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Date Written: October 7, 2008

Abstract

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.

Keywords: Expectations, Consumption, Euler equations

JEL Classification: D91, D84, D12

Suggested Citation

Kapteyn, Arie and Kleinjans, Kristin J. and van Soest, Arthur, Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations (October 7, 2008). CentER Discussion Paper Series No. 2008-85. Available at SSRN: https://ssrn.com/abstract=1280758 or http://dx.doi.org/10.2139/ssrn.1280758

Arie Kapteyn (Contact Author)

Dornsife Center for Economic and Social Research - University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States
310-448-5383 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Kristin J. Kleinjans

California State University, Fullerton - Department of Economics ( email )

Fullerton, CA 92834
United States

HOME PAGE: http://business.fullerton.edu/Economics/kkleinjans/

Arthur H. O. van Soest

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

RAND Corporation ( email )

P.O. Box 2138
1776 Main Street
Santa Monica, CA 90407-2138
United States

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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