A Life-Cycle Consumption Model with Ambiguous Survival Beliefs

Alexander Zimper, Alexander Ludwig and Max Groneck

No 693, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2012
New Economics Papers: this item is included in nep-age and nep-dge
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