DISCOUNTING AND CONSUMPTION OVER AN UNCERTAIN HORIZON: DRAW-DOWN PLANS FOR FAMILY TRUSTS

Stephen Satchell () and Susan Thorp ()

CAMA Working Papers from Australian National University, Centre for Applied Macroeconomic Analysis

Abstract: Individuals, endowments and trusts face uncertain lifetimes. When the planning horizon of an entity is stochastic and Pareto distributed, hyperbolic discounting and time-varying consumption rates are optimal. We derive expressions for the optimal rate of consumption (draw-down) from wealth for family trusts facing positive probabilities of extinction at each generation. Using birth statistics for the UK, we compute family extinction probabilities and show that they are well-approximated by a Pareto distribution, hence family trusts will discount hyperbolically. Numerically optimised consumption paths for family trusts with CRRA preferences are decreasing but always higher than for infinitely-lived trusts.

JEL-codes: G0 D9 (search for similar items in EconPapers)
Date: 2008-01
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http://cama.anu.edu.au/Working%20Papers/Papers/2008/Satchell_Thorp_22008.pdf (application/pdf)

Related works:
Working Paper: Discounting and Consumption Over an Uncertain Horizon: Draw-Down Plans for Family Trusts (2007)
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