This article estimates the importance of temptation for consumption smoothing and asset accumulation in a life‐cycle model. We use two complementary estimation strategies: first, we estimate the model‐implied Euler equation; second, we match liquid and illiquid wealth accumulation using the method of simulated moments. In both cases, we find that the utility cost of temptation is one‐quarter of the utility benefit of consumption. Further, temptation is crucial for correctly estimating the elasticity of intertemporal substitution (EIS): EIS estimates are biased downward when ignoring temptation. Finally, the model only matches the share of illiquid wealth if temptation is in the preference specification.
Authors
Hamish Low
Hamish is the James Meade Professor of Economics at the University of Oxford, a Professorial Fellow of Nuffield College and a Research Fellow at IFS.
Patrick Moran
Patrick is a Research Fellow at the IFS, an Assistant Professor of Economics at the University of Copenhagen and a faculty member in the CEBI.
Agnes Kovacs
Agnes is an applied economist who uses economic models and micro-level data to better understand the consumption and savings behaviour of households.
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