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A rank-dependent utility model of uncertain lifetime

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  • Drouhin, Nicolas

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.

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  • Drouhin, Nicolas, 2015. "A rank-dependent utility model of uncertain lifetime," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 208-224.
    • Handle: RePEc:eee:dyncon:v:53:y:2015:i:c:p:208-224
    DOI: 10.1016/j.jedc.2015.02.003
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    Cited by:

    1. Drouhin, Nicolas, 2020. "Non-stationary additive utility and time consistency," Journal of Mathematical Economics, Elsevier, vol. 86(C), pages 1-14.
    2. Han, Nan-Wei & Hung, Mao-Wei, 2021. "The annuity puzzle and consumption hump under ambiguous life expectancy," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 76-88.
    3. Hippolyte d’Albis & Emmanuel Thibault, 2018. "Ambiguous life expectancy and the demand for annuities," Theory and Decision, Springer, vol. 85(3), pages 303-319, October.
    4. Groneck, Max & Ludwig, Alexander & Zimper, Alexander, 2024. "Who saves more, the naive or the sophisticated agent?," Journal of Economic Theory, Elsevier, vol. 219(C).
    5. Nicolas Drouhin, 2018. "Theoretical considerations on the retirement consumption puzzle and the optimal age of retirement," Working Papers halshs-01767096, HAL.
    6. John Armstrong & Cristin Buescu, 2019. "Collectivised Post-Retirement Investment," Papers 1909.12730, arXiv.org, revised Apr 2020.
    7. Nicolas Drouhin, 2016. "Non stationary additive utility and time consistency," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01238584, HAL.

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    More about this item

    Keywords

    Life cycle theory of consumption and savings; Uncertain lifetime; Time consistency; Rank-dependent utility; Cumulative prospect theory; Consumption hump;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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