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A rank-dependent utility model of uncertain lifetime

Nicolas Drouhin ()

Journal of Economic Dynamics and Control, 2015, vol. 53, issue C, 208-224

Abstract: In a continuous time life cycle model of consumption with an uncertain lifetime, we use a non-parametric specification of rank-dependent utility theory to characterize the preferences of the agent. We prove that time consistency holds for a subclass of probability-weighting function, providing the foundation for a constant rate of time preference that interacts multiplicatively with the hazard rate instead of additively as in the Yaari (1965) seminal model. We calibrate both models to explain the hump in the life-cycle consumption, and show that the multiplicative model is more robust.

Keywords: Life cycle theory of consumption and savings; Uncertain lifetime; Time consistency; Rank-dependent utility; Cumulative prospect theory; Consumption hump (search for similar items in EconPapers)
JEL-codes: D81 D91 (search for similar items in EconPapers)
Date: 2015
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Related works:
Working Paper: A rank-dependent utility model of uncertain lifetime (2015)
Working Paper: A rank-dependent utility model of uncertain lifetime (2015)
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