An optimization model of retiree decisions under recursive utility with housing

Asiye Aydilek () and Harun Aydilek
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Asiye Aydilek: Gulf University for Science and Technology
Harun Aydilek: Gulf University for Science and Technology

Journal of Economics and Finance, 2020, vol. 44, issue 2, No 3, 258-277

Abstract: Abstract We investigate both of analytical and numerical solutions of retirees’ spending and investment decisions. We use a dynamic and realistic recursive utility setting which includes the standard expected utility setting as a special case. We find that recursive utility is superior to expected utility in terms of predicting retirees’ consumption data. In addition to stock and bond investment decisions, we explicitly include housing decision. Our setting includes the setting without housing as a special case. We estimate retiree decisions numerically through simulations. We provide both of analytical and numerical comparative analysis which shows that some of the analytical dependencies are found to be weak numerically. For example, although marginal propensity to consume depends on the parameter of intertemporal substitution analytically, this dependence is found to be weak numerically. These differences show the importance of providing both of analytical and the numerical solutions. Our analytical solution could be useful for future studies to estimate some model parameters, to evaluate different elderly related policies, to quantify the welfare effects of different decisions and to analyze the parameter related issues such as the interchangeability of some parameters.

Keywords: Housing; Recursive utility; Retiree; Investment; Risk aversion; Marginal propensity to consume (search for similar items in EconPapers)
JEL-codes: C02 C61 D11 D81 D91 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s12197-019-09485-5

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