Recursive Preferences and the Value of Life: A Clarification

36 Pages Posted: 11 Nov 2016 Last revised: 12 Jan 2021

See all articles by Antoine Bommier

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Daniel Harenberg

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich; Oxford Economics

Francois Le Grand

EMLYON Business School

Date Written: January 11, 2021

Abstract

Two articles (Hugonnier et al., 2013; Córdoba and Ripoll, 2017) have proposed a recursive formulation of utility functions combining a positive value of life, preference homotheticity, and a constant elasticity of substitution. However, when the elasticity of substitution is below one and mortality rates take plausible values, this recursive formulation admits only a unique solution where utility is constant and equals zero everywhere. Non-constant solutions may only exist if mortality rates are assumed to remain low at all ages, namely in a world of perpetually young agents. Such solutions are therefore unsuitable for studying the value of life in demographically relevant settings and yield counterfactual predictions for saving behavior. We conclude this clarifying paper by reviewing various recursive specifications that can be used to study the value of life with no such problems.

Keywords: value of life, recursive utility, life-cycle models

JEL Classification: G11, J17

Suggested Citation

Bommier, Antoine and Harenberg, Daniel and Le Grand, François, Recursive Preferences and the Value of Life: A Clarification (January 11, 2021). Available at SSRN: https://ssrn.com/abstract=2867570 or http://dx.doi.org/10.2139/ssrn.2867570

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Daniel Harenberg

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Oxford Economics ( email )

United Kingdom

François Le Grand (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

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