We study testable implications for the dynamics of consumption and income of models in which first-best allocations are not achieved because of a moral hazard problem with hidden saving. We show that in this environment, agents typically achieve more insurance than that obtained under self-insurance with a single asset. Consumption allocations exhibit “excess smoothness,” as found and defined by Campbell and Deaton (1989). We argue that excess smoothness, in this context, is equivalent to a violation of the intertemporal budget constraint considered in a Bewley economy (with a single asset). We also show parameterizations of our model in which we can obtain a closed-form solution for the efficient insurance contract and where the excess smoothness parameter has a structural interpretation in terms of the severity of the moral hazard problem. We present tests of excess smoothness, applied to U.K. microdata and constructed using techniques proposed by Hansen, Roberds, and Sargent (1991) to test the intertemporal budget constraint. Our theoretical model leads us to interpret them as tests of the market structure faced by economic agents. We also construct a test based on the dynamics of the cross-sectional variances of consumption and income that is, in a precise sense, complementary to that based on Hansen, Roberds, and Sargent (1991) and that allows us to estimate the same structural parameter. The results we report are consistent with the implications of the model and are internally coherent.

In this paper we present empirical evidence on aggregation problems with Euler equations for consumption. Our main results are: estimates of the elasticity of intertemporal substitution for consumption are consistently lower for aggregate data than for average cohort data and the theoretical model is statistically rejected on aggregate data, not rejected on average cohort data. In trying to explain these differences we find that a major role is played by the non-linearity of the estimable equation and by omitted demographic factors (normally unobservable on aggregate data). However, even when these sources of aggregation bias are corrected for, the estimates of the elasticity of intertemporal substitution obtained from aggregate data remain lower than those obtained from average cohort data, and excess sensitivity tests reject the implications of the model. This can be explained as the result of imposing identical coefficients to cohorts who differ in preferences and/or opportunity sets.

The theory of intertemporal choice predicts that the cross-sectional variance of the marginal utility of consumption is equal to its own lag plus a constant and a random component. Using general preference specifications and some assumptions about the nature of the random component, we provide an explicit test of this hypothesis. Our approach circumvents the necessity to identify a pure age profile of the cross-sectional variance of consumption and yields a well-specified statistical test. This test is applied to data from the United States, the United Kingdom, and Italy. The results are remarkably consistent with the restrictions implied by the theory of intertemporal consumption choices.

Using three major U.K. pension reforms as natural experiments we investigate the relationship between pension saving and discretionary private savings. Unlike most differences-in-differences approaches which rely on average differences between control and treatment group, we use economic theory to model the response of each individual household. The empirical analysis, based on the Family Expenditure Survey, uses both time-series and cross-sectional variation to identify the behavioral response. The earnings-related tier of the pension scheme is found to have a negative impact on private savings with relatively high substitution elasticities; the impact of the flat-rate tier is not significantly different from zero.

We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.

In this paper, the authors show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. They propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. The authors estimate preference parameters using the only U.S. micro data set with complete consumption information. They show that previous rejections can be explained by the simplifying assumptions made in previous studies. The authors also show that results obtained using good consumption or aggregate data can be misleading.

This paper provides a descriptive analysis of the long- and short-run correlations among saving, investment, and growth rates for 123 countries over the period 1961-94. Three results are robust across data sets and estimation methods: i) lagges saving rates are positively related to investment rates; ii) investment rates Granger cause growth rates with a negative sign; iii) growth rates Granger-cause investment with a positive sign.

This paper studies the life-cycle labor supply of three cohorts of American women, born in the 1930s, 1940s, and 1950s. We focus on the increase in labor supply of mothers between the 1940s and 1950s cohorts. We construct a life-cycle model of female participation and savings, and calibrate the model to match the behavior of the middle cohort. We investigate which changes in the determinants of labor supply account for the increases in participation early in the life-cycle observed for the youngest cohort. A combination of a reduction in the cost of children alongside a reduction in the wage-gender gap is needed.

We estimate production functions for cognition and health for children aged 1–12 in India, based on the Young Lives Survey. India has over 70 million children aged 0–5 who are at risk of developmental deficits. The inputs into the production functions include parental background, prior child cognition and health, and child investments, which are taken as endogenous. Estimation is based on a nonlinear factor model, based on multiple measurements for both inputs and child outcomes. Our results show an important effect of early health on child cognitive development, which then becomes persistent. Parental investments affect cognitive development at all ages, but more so for younger children. Investments also have an impact on health at early ages only.

We investigate the possibility that limited participation in asset markets, and the stock market in particular, might explain the lack of correspondence between the sample moments of the intertemporal marginal rate of substitution and asset returns in U.K. data. We estimate ownership probabilities to separate “likely” shareholders from nonshareholders, enabling us to control for changing composition effects as well as selection into the group. We then construct estimates of the IMRS for each of these different groups and consider their time‐series properties. We find that the consumption growth of shareholders is more volatile than that of nonshareholders and more highly correlated with excess returns to shares. In particular, one cannot reject the predictions of the consumption capital asset pricing model for the group of households predicted to own both assets. This is in contrast to the failure of the model when estimated on data for all households.