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A Life-Cycle Model with Ambiguous Survival Beliefs

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  • Max Groneck
  • Alexander Ludwig
  • Alexander Zimper

Abstract

On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.

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Bibliographic Info

Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 63.

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Date of creation: 15 May 2013
Date of revision: 22 Nov 2013
Handle: RePEc:kls:series:0063

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Keywords: Cumulative prospect theory; Choquet expected utility; Dynamic inconsistency; Life-cycle hypothesis; Saving puzzles;

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  1. #HEJC papers for August 2013
    by academichealtheconomists in The Academic Health Economists' Blog on 2013-07-31 23:00:48
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Cited by:
  1. Groneck, Max & Ludwig, Alexander & Zimper, Alexander, 2013. "Ambiguous Survival Beliefs and Hyperbolic Discounting in a Life-Cycle Model," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79878, Verein für Socialpolitik / German Economic Association.

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