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A Life-Cycle Model with Ambiguous Survival Beliefs

  • Groneck, Max
  • Ludwig, Alexander

    ()

  • Zimper, Alexander

    (Munich Center for the Economics of Aging (MEA))

On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold longer on to their assets than their rational expectations counterparts who correctly assess survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical fi…ndings on household saving behavior.

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Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 13270.

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Date of creation: 02 Jul 2013
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Handle: RePEc:mea:meawpa:13270
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