Intertemporal consumption with directly measured welfare functions and subjective expectations

Area of Science:

• Behavioral Economics
• Econometrics
• Consumer Behavior

Background:

• Traditional Euler equation estimation for intertemporal consumption models relies on numerous, often unverifiable, assumptions regarding expectations and preferences.
• These assumptions pose significant challenges in accurately modeling household consumption decisions.

Purpose of the Study:

• To reduce the reliance on unverifiable assumptions in intertemporal consumption models.
• To incorporate direct subjective information on respondents' preferences and expectations.
• To assess the predictive power of individually measured welfare functions and expectations on consumption variation.

Main Methods:

• Utilized direct subjective information on respondents' preferences and expectations.
• Estimated welfare functions and expectations at the individual household level.
• Employed a model that requires only cross-section data for estimation.

Main Results:

• Individually measured welfare functions and expectations demonstrate predictive power for household consumption variation.
• Estimates of the intertemporal elasticity of substitution derived from these welfare functions are plausible.
• The derived estimates are comparable in magnitude to those found in existing literature.

Conclusions:

• Directly measuring subjective welfare and expectations can significantly simplify and improve intertemporal consumption models.
• The proposed method offers a more robust alternative to traditional Euler equation estimation.
• The model's requirement for only cross-section data enhances its practical applicability.