Estimating Temptation And Commitment Over The Life Cycle

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.