Econometric Approaches to the Specification of Life-Cycle Labour Supply and Commodity Demand Behaviour

Many of the recently developed alternative econometric approaches to the construction and estimation of life-cycle consistent models using individual data can be viewed as alternative choices for conditioning variables that summarise past decisions and future anticipations. By ingenious choice of this conditioning variable and by exploitation of the duality relationships between the alternative specifications, many currently available microdata sets can be used for the estimation of life-cycle consistent models. We review alternative approaches and highlight their stochastic properties and implicit preference restrictions. Indeed, empirical specifications that are parameterised in a form of direct theoretical interest often can be shown to be unnecessarily restrictive, while dual representations may provide more flexible econometric models. These results indicate the particular advantages of different types of data in retrieving life-cycle consistent preference parameters and the most appropriate and flexible econometric approach for each type of data. We develop a methodology for relaxing the intertemporal separability assumption and consider the advantages and disadvantages of alternative approaches in this framework.