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Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality

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  • Foltyn, Richard
  • Olsson, Jonna

Abstract

This paper examines how objective and subjective heterogeneity in life expectancy affects savings behavior of healthy and unhealthy people. Using data from the Health and Retirement Study, we first document systematic biases in survival beliefs across self-reported health: those in poor health not only have a shorter actual lifespan but also underestimate their remaining life time. To gauge the effect on savings behavior and wealth accumulation, we use an overlapping-generations model where survival probabilities and beliefs evolve according to a health and survival process estimated from data. We conclude that differences in life expectancy are important to understand savings behavior, and that the belief biases, especially among the unhealthy, can explain up to a fifth of the observed health-wealth gap.

Suggested Citation

  • Foltyn, Richard & Olsson, Jonna, 2024. "Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality," EconStor Preprints 294009, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:294009
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    More about this item

    Keywords

    life expectancy; preference heterogeneity; subjective beliefs; life cycle;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality

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