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Consumption and life insurance decisions under hyperbolic discounting and taxation

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  • Koo, Ja Eun
  • Lim, Byung Hwa

Abstract

In this study, we investigates the time-inconsistent agent's optimal consumption, life insurance purchase, and investment decisions under a tax system. We find analytically that the marginal propensity to consume (MPC) for the time-inconsistent (naïve or sophisticated) agent is larger than that of the time-consistent agents. Based on the numerical results, we show that the time-inconsistent preferences result in a lower demand for life insurance, which may explain why people purchase insufficient life insurance. Further, the sophisticated agent reacts more sensitively to an insurance tax rate increase than the time-consistent agent.

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  • Koo, Ja Eun & Lim, Byung Hwa, 2021. "Consumption and life insurance decisions under hyperbolic discounting and taxation," Economic Modelling, Elsevier, vol. 94(C), pages 288-295.
    • Handle: RePEc:eee:ecmode:v:94:y:2021:i:c:p:288-295
    DOI: 10.1016/j.econmod.2020.10.003
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    Cited by:

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    3. Jin, Lawrence & Kang, Minwook, 2023. "Human-capital investments as a commitment device," Economic Modelling, Elsevier, vol. 126(C).
    4. Choi, Yoonseok & Kim, Sunghyun Henry, 2021. "Understanding the effects of government spending in a time-inconsistent model," Economic Modelling, Elsevier, vol. 98(C), pages 266-279.

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    More about this item

    Keywords

    Time-inconsistent preference; Hyperbolic discounting; Taxation; Life-insurance; Insufficient life insurance puzzle;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G1 - Financial Economics - - General Financial Markets

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