Who Saves More, the Naive or the Sophisticated Agent?

Alexander Ludwig, Max Groneck and Alexander Zimper

No 16412, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We consider an additively time-separable life-cycle model for the family of power period utility functions u such that u'(c) = c^(-theta) for resistance to inter-temporal substitution of theta > 0. The utility maximization problem over life-time consumption is dynamically inconsistent for almost all specifications of effective discount factors. Pollak (1968) shows that the savings behavior of a sophisticated agent and her naive counterpart is always identical for a logarithmic utility function (i.e., for theta = 1). As an extension of Pollak's result we show that the sophisticated agent saves a greater (smaller) fraction of her wealth in every period than her naive counterpart whenever theta > 1 (theta

Keywords: Life-cycle model; Discount functions; Dynamic inconsistency; Savings behavior; Naive agent; Sophisticated agent; Choquet expected utility preferences; Epstein-weil-zin preferences (search for similar items in EconPapers)
JEL-codes: D15 D91 E21 (search for similar items in EconPapers)
Date: 2021-07
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Journal Article: Who saves more, the naive or the sophisticated agent? (2024)
Working Paper: Who saves more, the naive or the sophisticated agent? (2022)
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