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Recursive Preferences, the Value of Life, and Household Finance

Antoine Bommier, Daniel Harenberg, François Le Grand and Cormac O'Dea
Additional contact information
Antoine Bommier: ETH Zurich
François Le Grand: EMLyon Business School

No 2231R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We analyze lifecycle saving strategies using a recursive utility model calibrated to match empirical estimates of the value of a statistical life. The novelty of our approach is that we require preferences to be monotone with respect to first order stochastic dominance. The framework we use can disentangle risk aversion and the intertemporal elasticity and can feature a positive value of life without placing constraints on the value of the risk aversion parameter or the intertemporal elasticity of substitution. We show that, with a positive value of life, risk aversion reduces savings, decreases stock market participation and decreases annuity purchase. Risk averse agents are willing to make an early death a not-so-adverse outcome by enjoying greater consumption when young and bequeathing wealth in case of death. The model can rationalize low annuity demand while also matching empirically documented levels of wealth and private investments in stocks.

Keywords: Lifecycle model; Value of life; Risk aversion; Saving choices; Portfolio choices; Annuity puzzle; Recursive utility (search for similar items in EconPapers)
JEL-codes: D91 G11 J14 J17 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2020-05, Revised 2020-12
New Economics Papers: this item is included in nep-dge and nep-upt
Note: Includes supplemental material
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