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

30 Pages Posted: 6 Sep 2017

Multiple version iconThere are 2 versions of this paper

Date Written: October 2017

Abstract

I estimate by maximum likelihood a dynamic model of optimal intertemporal allocation of consumption in the presence of children using high‐quality Danish longitudinal data. The number and age of all children can affect the marginal utility of consumption while income uncertainty, credit constraints and postretirement motives also influence household behaviour. While I estimate that children have a surprisingly small effect on the marginal utility of non‐durable consumption, data simulated from the estimated model replicates similar correlations between log consumption growth and changing household composition as found in the Danish data and typically found in UK and US data. To reconcile the results with existing studies, I illustrate how ignoring precautionary motives increases the estimated importance of children. The results indicate that precautionary motives might play a larger role than children in explaining the observed consumption age profile.

Suggested Citation

Jørgensen, Thomas, Life‐Cycle Consumption and Children: Evidence from a Structural Estimation (October 2017). Oxford Bulletin of Economics and Statistics, Vol. 79, Issue 5, pp. 717-746, 2017, Available at SSRN: https://ssrn.com/abstract=3032801 or http://dx.doi.org/10.1111/obes.12170

Thomas Jørgensen (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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