Life-Cycle Consumption and Children

CAM Working paper no. 2014-02

58 Pages Posted: 26 Oct 2014

Date Written: January 21, 2014

Abstract

I show that conventional estimators based on the consumption Euler equation, extensively used in studies of intertemporal consumption behavior, produce inconsistent estimates of the effect of children on consumption if potentially binding credit constraints are ignored. As a more constructive contribution, I supply a tractable approach to obtaining bounds on the effect of children and a structural estimation strategy when households face constraints. Finally, I estimate the effect of children on consumption using the Panel Study of Income Dynamics (PSID) for the US and high quality Danish administrative register data. Results suggest that children does not affect household consumption in the same magnitude previously assumed.

Keywords: Consumption, Children, Life Cycle, Credit Constraints, Structural Estimation

JEL Classification: D12, D14, D91, E21

Suggested Citation

Jørgensen, Thomas, Life-Cycle Consumption and Children (January 21, 2014). CAM Working paper no. 2014-02, Available at SSRN: https://ssrn.com/abstract=2514582 or http://dx.doi.org/10.2139/ssrn.2514582

Thomas Jørgensen (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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