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ESTIMATING TEMPTATION AND COMMITMENT OVER THE LIFE CYCLE
Author(s) -
Kovacs Agnes,
Low Hamish,
Moran Patrick
Publication year - 2021
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12491
Subject(s) - temptation , consumption smoothing , elasticity of intertemporal substitution , economics , consumption (sociology) , econometrics , time preference , preference , estimation , asset (computer security) , microeconomics , business cycle , computer science , macroeconomics , psychology , growth model , social psychology , social science , computer security , management , sociology
This article estimates the importance of temptation for consumption smoothing and asset accumulation in a life‐cycle model. We use two complementary estimation strategies: first, we estimate the model‐implied Euler equation; second, we match liquid and illiquid wealth accumulation using the method of simulated moments. In both cases, we find that the utility cost of temptation is one‐quarter of the utility benefit of consumption. Further, temptation is crucial for correctly estimating the elasticity of intertemporal substitution (EIS): EIS estimates are biased downward when ignoring temptation. Finally, the model only matches the share of illiquid wealth if temptation is in the preference specification.