Life-Cycle Consumption and Children
CAM Working paper no. 2014-02
58 Pages Posted: 26 Oct 2014
Date Written: January 21, 2014
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: Suggested Citation