Consumption, investment and life insurance strategies with heterogeneous discounting

In this paper we analyze how the optimal consumption, investment and life insur- ance rules are modified by the introduction of a class of time-inconsistent preferences. In particular, we account for the fact that an agents preferences evolve along the planning horizon according to her increasing co...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors de-Paz, Albert, Marin-Solano, Jesus, Navas, Jorge, Roch, Oriol
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2012
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Summary:In this paper we analyze how the optimal consumption, investment and life insur- ance rules are modified by the introduction of a class of time-inconsistent preferences. In particular, we account for the fact that an agents preferences evolve along the planning horizon according to her increasing concern about the bequest left to her descendants and about her welfare at retirement. To this end, we consider a stochas- tic continuous time model with random terminal time for an agent with a known distribution of lifetime under heterogeneous discounting. In order to obtain the time- consistent solution, we solve a non-standard dynamic programming equation. For the case of CRRA and CARA utility functions we compare the explicit solutions for the time-inconsistent and the time-consistent agent. The results are illustrated numeri- cally.