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A Life-Cycle Model with Ambiguous Survival Beliefs

Listed author(s):
  • Max Groneck

    ()

    (CMR, University of Cologne; Netspar; Albertus-Magnus-Platz; 50923 Köln; Germany)

  • Alexander Ludwig

    ()

    (SAFE, Goethe University Frankfurt; MEA; Netspar; House of Finance; Grüneburgplatz 1; 60323 Frankfurt am Main; Germany
    Department of Economics; University of Pretoria; Private Bag X20; Hatfield 0028; South Africa)

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 em- bedded 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 larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201465.

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Length: 53 pages
Date of creation: Oct 2014
Handle: RePEc:pre:wpaper:201465
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