Earnings-Related Borrowing Restrictions: Empirical Evidence from a Pseudo Panel for the U.K.

The life-cycle model with liquidity constraints produces an Euler equation with unobservable Kuhn-Tucker multipliers. If borrowing restrictions depend on earnings and leisure is a choice variable one can derive an Euler equation involving only observable variables. This paper presents estimates of the Euler equation on a pseudo (or "synthetic") panel of UK households. Most parameters are well determined and in agreement with the model's predictions. They can therefore be used to evaluate each cohort's Kuhn-Tucker multiplier over the sample period.