Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/223300 
Year of Publication: 
2020
Series/Report no.: 
IFS Working Papers No. W20/24
Publisher: 
Institute for Fiscal Studies (IFS), London
Abstract: 
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: first, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We find that the utility cost of temptation is one-quarter of the utility benefit 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 profiles for both liquid and illiquid wealth only if temptation is part of the preference specification. Our findings on the importance of temptation are robust to the different estimation strategies.
Subjects: 
life-cycle
temptation preferences
housing
estimating Euler equations
JEL: 
D12
D91
E21
G11
R21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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