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Uncertain lifetime and intertemporal choice : risk aversion as a rationale for time discounting

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Abstract

This paper makes explicit the links between preferences over lotteries on length of life and intertemporal choice. I show that the approach used by traditional life cycle models to account for uncertain survival corresponds to a strong assumption of risk neutrality with respect to the length of life. Relaxing such an assumption leads us to develop a more general formulation of lifetime utility in which time preferences are directly related to preferences over length of life. In particular, it provides an explanation for exponential and hyperbolic discounting which are found to result, in a first approximation, from constant and hyperbolic risk aversion with respect to the length of life.

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File URL: http://www.inra.fr/Internet/Departements/ESR/UR/lea/documents/wp/wp0108.pdf
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Bibliographic Info

Paper provided by Laboratoire d'Economie Appliquee, INRA in its series Research Unit Working Papers with number 0108.

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Length: 35 pages
Date of creation: Dec 2001
Date of revision:
Handle: RePEc:lea:leawpi:0108

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Related research

Keywords: Intertemporal choice; life cycle model; uncertain lifetime; time inconsistency; hyperbolic discounting.;

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References

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  1. Antoine Bommier, 2001. "Aversion for early death and the structure of time preference," Research Unit Working Papers 0106, Laboratoire d'Economie Appliquee, INRA.
  2. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  3. George Loewenstein & Richard H Thaler, 2003. "Anomalies: Intertemporal Choice," Levine's Working Paper Archive 618897000000000784, David K. Levine.
  4. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  5. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
  6. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  7. Leung, S.F., 1992. "Uncertain Lifetime, the Theory of the Consumer, and the Life Cycle Hypothesis," RCER Working Papers 323, University of Rochester - Center for Economic Research (RCER).
  8. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  9. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
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