Estimating Discount Functions from Lifecycle Consumption Choices

This paper uses Þeld evidence and a structural consumption-savings model to estimate discount functions. Evidence on wealth accumulation implies that people act patiently when considering long-term decisions, while data on credit card borrowing and consumption-income comovement suggests impatient behavior in the short term. Using the Method of Simulated Moments we estimate an institutionally rich model that features stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and quasi-hyperbolic discount functions. We Þnd benchmark estimates of 40% for the shortterm discount rate and 4.3% for the long-term discount rate. Most speciÞcations reject the null hypothesis of time-consistent exponential discounting. Exact quantitative results depend on assumptions about the return on illiquid assets and the coefficient of relative risk aversion. JEL classiÞcation: D91 (Intertemporal Consumer Choice; Lifecycle Models and Saving), E21 (Consumption; Saving) ∗David Laibson is Professor of Economics, Harvard University, and Faculty Research Fellow, National Bureau of Economic Research, Cambridge, Massachusetts. Andrea Repetto is Assistant Professor of Industrial Engineering, University of Chile, Santiago, Chile. Jeremy Tobacman is a graduate student in economics, Harvard University, Cambridge, Massachusetts. We received helpful advice from Alberto Alesina, Orazio Attanasio, Felipe Balmaceda, Robert Barro, John Campbell, Christopher Carroll, Pierre-Olivier Gourinchas, Cristóbal Huneeus, Greg Mankiw, Jonathan Parker, Ariel Pakes, Raimundo Soto, Samuel Thompson, Nicholas Souleles, Motohiro Yogo, and seminar audiences at Harvard University, Stanford University, University of Chile, Central Bank of Chile and the NBER. Laibson acknowledges Þnancial support from the National Science Foundation (SBR-9510985), the National Institute on Aging (R01-AG-16605), the MacArthur Foundation and the Olin Foundation; Repetto, from DID-Universidad de Chile, FONDECYT (1990004), Fundación Andes and an institutional grant to CEA from the Hewlett Foundation; and Tobacman from a National Science Foundation Graduate Research Fellowship.