Abstract
In this paper, we analyse and construct a lifetime utility maximisation model with hyperbolic discounting. Within the model, a number of assumptions are made: complete markets, actuarially fair life insurance/annuity is available, and investors have time-dependent preferences. Time dependent preferences are in contrast to the usual case of constant preferences (exponential discounting). We find: (1) investors (realistically) demand more life insurance after retirement (in contrast to the standard model, which showed strong demand for life annuities), and annuities are rarely purchased; (2) optimal consumption paths exhibit a humped shape (which is usually only found in incomplete markets under the assumptions of the standard model).
| Original language | English |
|---|---|
| Article number | 43 |
| Pages (from-to) | 1-10 |
| Number of pages | 10 |
| Journal | Risks |
| Volume | 6 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - Jun 2018 |
Bibliographical note
Copyright 2018 by the authors. Licensee MDPI, Basel, Switzerland. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.Keywords
- hyperbolic discounting
- dynamic programming
- consumption
- portfolio rules
- life insurance
- life annuity
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