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A Life-Cycle Consumption Model with Ambiguous Survival Beliefs

  • Alexander Zimper

    (University of Pretoria)

  • Alexander Ludwig

    (CMR, University of Cologne)

  • Max Groneck

    (University of Cologne)

On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We parameterize a learning model of subjective survival beliefs with psychological biases such that we replicate these patterns. We then combine this learning model with an otherwise standard life-cycle model of consumption and savings. In line with empirical findings we show that our agents consume more at younger ages and dissave less at old age than agents who perfectly foresee their survival probabilities. We also show that our information driven model yields similar predictions as a preference based hyperbolic discounting model.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 693.

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Date of creation: 2012
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Handle: RePEc:red:sed012:693
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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