Scenario Analysis With Recursive Utility: Dynamic Consumption Plans For Charitable Endowments
AbstractWe determine optimal consumption paths under a series of returns scenarios for charitable endowments with distinct tastes over investment risk and inter-temporal substitution. Charities typically prefer smooth consumption paths but are investment-risk tolerant. Using a recursive, Kreps-Porteus utility function, we model the optimal disbursement from an infinitely-lived charitable trust, then, allowing a general form for the returns density, we apply stochastic dominance relations to estimate income/substitution effects whereby a change in future returns influences the current consumption rate. The elasticity of intertemporal substitution rather than risk aversion is key: optimal consumption rises or falls as the elasticity diverges from one.
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Bibliographic InfoPaper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-03.
Length: 52 pages
Date of creation: Jan 2008
Date of revision:
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Other versions of this item:
- Stephen Satchell & Susan Thorp, 2007. "Scenario Analysis with Recursive Utility: Dynamic Consumption Plans for Charitable Endowments," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 209, Quantitative Finance Research Centre, University of Technology, Sydney.
- G00 - Financial Economics - - General - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
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