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

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