Bequest Motives in Consumption-Portfolio Decisions with Recursive Utility

39 Pages Posted: 10 Jan 2020 Last revised: 10 Dec 2021

See all articles by Holger Kraft

Holger Kraft

Goethe University Frankfurt

Claus Munk

Copenhagen Business School

Farina Weiss

Goethe University Frankfurt

Date Written: December 3, 2021

Abstract

This paper studies finite-horizon consumption-portfolio decisions with recursive utility. We show that the parameter seemingly representing the individual's bequest preference in traditional recursive utility formulations is quantitatively and qualitatively misleading. The parameter value is uninformative about the optimal bequest which, in some cases, is even inversely related to the magnitude of the apparent bequest weight. We argue that the ratio between optimal bequest and the optimal consumption rate just before the terminal date is a much better representation of the strength of the bequest motive. Numerical examples illustrate the pitfalls using the traditional specification and clarifies how the bequest preference affects optimal decisions and the life-cycle patterns of consumption and wealth assuming constant investment opportunities or stochastic interest rates. We show that the typical utility representation for a unit elasticity of intertemporal substitution actually assumes a strong bequest preference.

Keywords: consumption-portfolio choice, life-cycle decisions, finite horizon, terminal condition, weight on bequest, Epstein-Zin utility

JEL Classification: D14, G11

Suggested Citation

Kraft, Holger and Munk, Claus and Weiss, Farina, Bequest Motives in Consumption-Portfolio Decisions with Recursive Utility (December 3, 2021). Available at SSRN: https://ssrn.com/abstract=3506725 or http://dx.doi.org/10.2139/ssrn.3506725

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Claus Munk

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

Farina Weiss

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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