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 Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 209.
Date of creation: 01 Dec 2007
Date of revision:
recursive utility; stochastic dominance; inter-temporal choice;
Other versions of this item:
- Stephen Satchell & Susan Thorp, 2008. "Scenario Analysis With Recursive Utility: Dynamic Consumption Plans For Charitable Endowments," CAMA Working Papers 2008-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-23 (All new papers)
- NEP-DGE-2008-02-23 (Dynamic General Equilibrium)
- NEP-UPT-2008-02-23 (Utility Models & Prospect Theory)
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