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Ambiguous Survival Beliefs and Hyperbolic Discounting in a Life-Cycle Model

Listed author(s):
  • Groneck, Max
  • Ludwig, Alexander
  • Zimper, Alexander

On average, young people underestimate whereas old people overestimate their chances to survive into the future. We employ a subjective survival belief model proposed by Ludwig and Zimper (2013), which can replicate these patterns. The model is compared with hyperbolic discounting within a standard life-cycle setting of consumption and savings. We show theoretically that the first order conditions of our ambiguous survival belief model closely resemble the generalized Euler-equation from the hyperbolic discounting model with an additional adjustment factor. In the numerical section it is shown that the subjective survival belief model simultaneously leads to undersaving at younger ages and high asset holdings and little dissaving of the elderly. The model can thus replicate two important empirical facts of the life-cycle literature at once which is not possible with a hyperbolic discounting model.

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File URL: https://www.econstor.eu/bitstream/10419/79878/1/VfS_2013_pid_285.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79878.

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Date of creation: 2013
Handle: RePEc:zbw:vfsc13:79878
Contact details of provider: Web page: http://www.socialpolitik.org/
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