Estimating temptation and commitment over the life-cycle

Working paper

This paper estimates the importance of temptation (Gul and Pesendorfer, 2001) for consumption smoothing and asset accumulation in a structural life-cycle model. We use two complementary estimation strategies: ?rst, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We ?nd that the utility cost of temptation is one-quarter of the utility bene?t of consumption. Further, we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution: estimates of the EIS are substantially higher than without temptation. Finally, our Method of Simulated Moments estimation is able to match well the life-cycle accumulation pro?les for both liquid and illiquid wealth only if temptation is part of the preference speci?cation. Our ?ndings on the importance of temptation are robust to the di?erent estimation strategies. Revised July 2020

Authors: Low, H; Moran, P; Kovacs, A

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2020-07-22
• Paper number: 796
• Keywords: estimating Euler equations; temptation preferences; life-cycle; housing