Quantitative Economics: Jul, 2018, Volume 9, Issue 2

The age‐time‐cohort problem and the identification of structural parameters in life‐cycle models

Sam Schulhofer‐Wohl

A standard approach to estimating structural parameters in life‐cycle models imposes sufficient assumptions on the data to identify the “age profile” of outcomes, then chooses model parameters so that the model's age profile matches this empirical age profile. I show that this approach is both incorrect and unnecessary: incorrect, because it generally produces inconsistent estimators of the structural parameters, and unnecessary, because consistent estimators can be obtained under weaker assumptions. I derive an estimation method that avoids the problems of the standard approach. I illustrate the method's benefits analytically in a simple model of consumption inequality and numerically by reestimating the classic life‐cycle consumption model of Gourinchas and Parker (2002).

Age‐time‐cohort identification problem life‐cycle models C23 D91 J1

Supplemental Material