Life Insurance and Annuity Demand under Hyperbolic Discounting

Siqi Tang, Sachi Purcal and Jinhui Zhang
Additional contact information
Siqi Tang: The QSuper Group, 70 Eagle Street, Brisbane, QLD 4000, Australia
Sachi Purcal: Department of Actuarial Studies and Business Analytics, Faculty of Business and Economics, Macquarie University, Sydney, NSW 2109, Australia
Jinhui Zhang: Department of Actuarial Studies and Business Analytics, Faculty of Business and Economics, Macquarie University, Sydney, NSW 2109, Australia

Risks, 2018, vol. 6, issue 2, 1-10

Abstract: In this paper, we analyse and construct a lifetime utility maximisation model with hyperbolic discounting. Within the model, a number of assumptions are made: complete markets, actuarially fair life insurance/annuity is available, and investors have time-dependent preferences. Time dependent preferences are in contrast to the usual case of constant preferences (exponential discounting). We find: (1) investors (realistically) demand more life insurance after retirement (in contrast to the standard model, which showed strong demand for life annuities), and annuities are rarely purchased; (2) optimal consumption paths exhibit a humped shape (which is usually only found in incomplete markets under the assumptions of the standard model).

Keywords: hyperbolic discounting; dynamic programming; consumption; portfolio rules; life insurance; life annuity (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:6:y:2018:i:2:p:43-:d:142704

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