Estimating Discount Functions with Consumption Choices over the Lifecycle.

Working paper

Intertemporal preferences are di¢cult to measure. We estimate time preferences using a structural bu¤er stock consumption model and the Method of Simulated Moments. The model includes stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and discount functions that allow short-run and long- run discount rates to di¤er. Data on retirement wealth accumulation, credit card borrowing, and consumption-income comovement identify the model. Our benchmark estimates imply a 40% short-term annualized discount rate and a 4.3% long-term annualized discount rate. Almost all speci…cations reject the restriction to a constant discount rate. Our quantitative results are sensitive to assumptions about the return on illiquid assets and the coe¢cient of relative risk aversion. When we jointly estimate the coe¢cient of relative risk aversion and the discount function, the short-term discount rate is 15% and the long-term discount rate is 3.8%.

Authors: Tobacman, J; Laibson, D; Repetto, A

• Publisher: Department of Economics (University of Oxford)
• Series: Discussion paper series
• Publication date: 2007-01-01
• Language: English