Euler Equation Estimation: Children and Credit Constraints

I show that conventional estimators based on the consumption Euler equation, intensively used in studies of intertemporal consumption behavior, produce biased estimates of the effect of children on consumption if potentially binding credit constraints are ignored. As a more constructive contribution, I supply a tractable approach to obtaining bounds on the effect of children and estimate these bounds using the Panel Study of Income Dynamics (PSID). Results suggest that children might not affect household consumption in the same magnitude previously assumed.