Consumption, investment and life insurance strategies with heterogeneous discounting
AbstractIn this paper we analyze how the optimal consumption, investment and life insur- ance rules are modified by the introduction of a class of time-inconsistent preferences. In particular, we account for the fact that an agents preferences evolve along the planning horizon according to her increasing concern about the bequest left to her descendants and about her welfare at retirement. To this end, we consider a stochas- tic continuous time model with random terminal time for an agent with a known distribution of lifetime under heterogeneous discounting. In order to obtain the time- consistent solution, we solve a non-standard dynamic programming equation. For the case of CRRA and CARA utility functions we compare the explicit solutions for the time-inconsistent and the time-consistent agent. The results are illustrated numeri- cally.
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Bibliographic InfoPaper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 277.
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Date of creation: 2012
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Other versions of this item:
- de-Paz, Albert & Marín-Solano, Jesús & Navas, Jorge & Roch, Oriol, 2014. "Consumption, investment and life insurance strategies with heterogeneous discounting," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 66-75.
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-03 (All new papers)
- NEP-DGE-2012-04-03 (Dynamic General Equilibrium)
- NEP-IAS-2012-04-03 (Insurance Economics)
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