A rank-dependent utility model of uncertain lifetime
Nicolas Drouhin ()
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL
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)
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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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Journal Article: A rank-dependent utility model of uncertain lifetime (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-01311140
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