Subjective data in a test of the life cycle model

  • Joppe de Ree Joppe de Ree

A frequently employed test on the validity of the life cycle model is based on the orthogonality conditions implied by the first order condition of the problem: the Euler equation of consumption (Hall 1978). These tests usually rely on arbitrary assumptionson functional form, and hence, test the empirical validity of one specific parameterization of the model. In this paper I relax this requirement. I propose to measure the marginal rate of substitution between today’s and last period’s consumption directly, using selfreported information on preferences. I reject the life cycle model with constant discount rates. The model with household specific discount rates is (only) borderline rejected.

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