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A rank-dependent utility model of uncertain lifetime

Nicolas Drouhin ()

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

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)
Date: 2015-04
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01311140
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Published in Journal of Economic Dynamics and Control, Elsevier, 2015, 53, pp.208-224. 〈10.1016/j.jedc.2015.02.003〉

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-01311140

DOI: 10.1016/j.jedc.2015.02.003

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