Consumption, investment and life insurance strategies with heterogeneous discounting

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

Insurance: Mathematics and Economics, 2014, vol. 54, issue C, 66-75

Abstract: In this paper we analyze how the optimal consumption, investment and life insurance rules are modified by the introduction of a class of time-inconsistent preferences. In particular, we account for the fact that an agent’s 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 stochastic 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 numerically.

Keywords: IE13; IE30; IM50; IB11; Heterogeneous discounting; Consumption and portfolio rules; Life insurance; Time-consistency (search for similar items in EconPapers)
JEL-codes: C61 D91 G11 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Consumption, investment and life insurance strategies with heterogeneous discounting (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:54:y:2014:i:c:p:66-75

DOI: 10.1016/j.insmatheco.2013.10.008

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