Life-Cycle Consumption and Children: Evidence from a Structural Estimation
39 Pages Posted: 26 May 2015
Date Written: May 17, 2015
I study how children affect the marginal utility of non-durable consumption. I estimate by Maximum Likelihood a structural economic model of optimal intertemporal allocation of consumption in the presence of children using high quality Danish administrative longitudinal data. Contrary to existing studies, I allow income uncertainty, credit constraints, and post-retirement motives to affect household behavior while the number and age of all children can affect the marginal utility of consumption. I estimate that children have a negligible effect on the marginal utility of non-durable consumption. To reconcile these results with existing studies, typically estimating an important role for children while ignoring precautionary motives, I illustrate how ignoring precautionary motives increases the estimated importance of children. I interpret the results as indicating that precautionary motives might play a larger role than children in explaining the observed consumption age profile.
Keywords: Consumption, Children, Precautionary saving, Life cycle, Structural Estimation
JEL Classification: D12, D14, D91
Suggested Citation: Suggested Citation