Discounting and Consumption Over an Uncertain Horizon: Draw-Down Plans for Family Trusts
AbstractIndividuals, endowments and trusts face uncertain lifetimes. When the planning horizon of an entity is stochastic and Pareto distributed, hyperbolic discounting and time-varying consumption rates are optimal. We derive expressions for the optimal rate of consumption (draw-down) from wealth for family trusts facing positive probabilities of extinction at each generation. Using birth statistics for the UK, we compute family extinction probabilities and show that they are well-approximated by a Pareto distribution, hence family trusts will discount hyperbolically. Numerically optimised consumption paths for family trusts with CRRA preferences are decreasing but always higher than for infinitely-lived trusts.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 210.
Date of creation: 01 Dec 2007
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family extinction; hyperbolic discounting; inter-temporal choice;
Other versions of this item:
- Stephen Satchell & Susan Thorp, 2008. "Discounting And Consumption Over An Uncertain Horizon: Draw-Down Plans For Family Trusts," CAMA Working Papers 2008-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-23 (All new papers)
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