Time Preference and Life Cycle Consumption with Endogenous Survival
Acharya, Arnab K;
Balvers, Ronald J;
(2004)
Time Preference and Life Cycle Consumption with Endogenous Survival.
Economic inquiry, 42 (4).
pp. 667-678.
ISSN 0095-2583
DOI: https://doi.org/10.1093/ei/cbh088
Permanent Identifier
Use this Digital Object Identifier when citing or linking to this resource.
We provide a structural theory of time preference and derive a functional form of intertemporal preferences by postulating that individuals make their life‐cycle consumption choices as if to maximize expected lifetime. This yields a nontime‐separable expected utility representation where the inverse of the coefficient of intertemporal substitution exceeds the coefficient of relative risk aversion. The rate of time preference depends on the inverse of expected remaining lifetime and the effect of age on the productivity of consumption in affecting health. The preference formulation is applied in a standard intertemporal consumption model to illustrate the implied life‐cycle consumption choices (JEL D91, B41).
