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Consumption and life insurance decisions under hyperbolic discounting and taxation

Ja Eun Koo and Byung Hwa Lim

Economic Modelling, 2021, vol. 94, issue C, 288-295

Abstract: In this study, we investigates the time-inconsistent agent's optimal consumption, life insurance purchase, and investment decisions under a tax system. We find analytically that the marginal propensity to consume (MPC) for the time-inconsistent (naïve or sophisticated) agent is larger than that of the time-consistent agents. Based on the numerical results, we show that the time-inconsistent preferences result in a lower demand for life insurance, which may explain why people purchase insufficient life insurance. Further, the sophisticated agent reacts more sensitively to an insurance tax rate increase than the time-consistent agent.

Keywords: Time-inconsistent preference; Hyperbolic discounting; Taxation; Life-insurance; Insufficient life insurance puzzle (search for similar items in EconPapers)
JEL-codes: D1 G1 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.econmod.2020.10.003

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