A reconsideration of the (in)sensitivity of tests of the intertemporal allocation of consumption to near rational alternatives

✍ Scribed by Edward L. Glaeser; Anna L. Paulson

• Book ID: 104293520
• Publisher: Elsevier Science
• Year: 1997
• Tongue: English
• Weight: 545 KB
• Volume: 21
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(97)00024-9

✦ Synopsis

This paper uses micro data to show that the utility loss from near-rational behavior can be very significant. We calculate the utility loss from using a sub-optimal consumption allocation rule in a permanent income setting where utility is quadratic. In contrast to estimates derived from aggregate data (Cochrane, 1987), we find that small deviations from the optimal consumption allocation rule lead to large utility losses, more than $lOO/quarter (1983 dollars).