Life-Cycle Consumption and Children: Evidence from a Structural Estimation

39 Pages Posted: 26 May 2015

Multiple version iconThere are 2 versions of this paper

Date Written: May 17, 2015

Abstract

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

Jørgensen, Thomas, Life-Cycle Consumption and Children: Evidence from a Structural Estimation (May 17, 2015). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 15-08, Available at SSRN: https://ssrn.com/abstract=2610560 or http://dx.doi.org/10.2139/ssrn.2610560

Thomas Jørgensen (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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