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A rank-dependent utility model of uncertain lifetime

Nicolas Drouhin ()

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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 \citet{Yaari1965} 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: consumption hump; borrowing constraint; risk aversion; intertemporal substitution; intertemporal choice; life cycle theory of consumption and savings; uncertain lifetime; time consistency; rank-dependent utility; cumulative prospect theory (search for similar items in EconPapers)
Date: 2015-04-15
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Published in Journal of Economic Dynamics and Control, 2015, 53, pp.208-224

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