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Who Saves More, the Naive or the Sophisticated Agent?

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  • Ludwig, Alexander
  • Groneck, Max
  • Zimper, Alexander

Abstract

We consider an additively time-separable life-cycle model for the family of power period utility functions u such that u'(c) = c^(-theta) for resistance to inter-temporal substitution of theta > 0. The utility maximization problem over life-time consumption is dynamically inconsistent for almost all specifications of effective discount factors. Pollak (1968) shows that the savings behavior of a sophisticated agent and her naive counterpart is always identical for a logarithmic utility function (i.e., for theta = 1). As an extension of Pollak's result we show that the sophisticated agent saves a greater (smaller) fraction of her wealth in every period than her naive counterpart whenever theta > 1 (theta

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  • Ludwig, Alexander & Groneck, Max & Zimper, Alexander, 2021. "Who Saves More, the Naive or the Sophisticated Agent?," CEPR Discussion Papers 16412, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16412
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    2. Adeline Delavande & Jinkook Lee & Seetha Menon, 2017. "Eliciting Survival Expectations of the Elderly in Low-Income Countries: Evidence From India," Demography, Springer;Population Association of America (PAA), vol. 54(2), pages 673-699, April.

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    More about this item

    Keywords

    Life-cycle model; Discount functions; Dynamic inconsistency; Savings behavior; Naive agent; Sophisticated agent; Choquet expected utility preferences; Epstein-weil-zin preferences;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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