Consumption, investment and life insurance strategies with heterogeneous discounting

Albert de-Paz, Jesus Marin-Solano, Jorge Navas and Oriol Roch
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Oriol Roch: Universitat de Barcelona

No 277, Working Papers in Economics from Universitat de Barcelona. Espai de Recerca en Economia

Abstract: In this paper we analyze how the optimal consumption, investment and life insur- ance rules are modified by the introduction of a class of time-inconsistent preferences. In particular, we account for the fact that an agents preferences evolve along the planning horizon according to her increasing concern about the bequest left to her descendants and about her welfare at retirement. To this end, we consider a stochas- tic continuous time model with random terminal time for an agent with a known distribution of lifetime under heterogeneous discounting. In order to obtain the time- consistent solution, we solve a non-standard dynamic programming equation. For the case of CRRA and CARA utility functions we compare the explicit solutions for the time-inconsistent and the time-consistent agent. The results are illustrated numeri- cally.

JEL-codes: C61 D91 G11 (search for similar items in EconPapers)
Pages: 0 pages
Date: 2012
New Economics Papers: this item is included in nep-dge and nep-ias
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Journal Article: Consumption, investment and life insurance strategies with heterogeneous discounting (2014)
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