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A rank-dependent utility model of uncertain lifetime, time consistency and life insurance

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  • Nicolas Drouhin

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, ENS Cachan - École normale supérieure - Cachan)

Abstract

In a continuous time life cycle model of consumption with uncertain lifetime and no ''pure time preference", we use a non-parametric specification of rank dependent utility theory to characterize the preferences of the agents. From normative point of view, the paper discusses the implication of adding an axiom of time consistency to the former model. We prove that time consistency holds for a much wider class of probability weighting functions than the identity one characterizing the expected utility model. This special class of probability weighting functions provides foundations for a constant subjective rate of discount which interact multiplicatively with the instantaneous conditional probability of dying. We show that even if agent are time consistent, life annuities no more provide perfect insurance against the risk to live.

Suggested Citation

  • Nicolas Drouhin, 2012. "A rank-dependent utility model of uncertain lifetime, time consistency and life insurance," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00748662, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00748662
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00748662v3
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    Keywords

    rank dependent utility; intertemporal choice; life cycle theory of consumption and saving; uncertain lifetime; life insurance; time consistency; rank dependent utility.;
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