Bequest Motives in Consumption-Portfolio Decisions with Recursive Utility

28 Pages Posted: 10 Jan 2020 Last revised: 29 Jun 2020

See all articles by Holger Kraft

Holger Kraft

Goethe University Frankfurt

Claus Munk

Copenhagen Business School

Farina Weiss

Goethe University Frankfurt

Date Written: June 29, 2020

Abstract

This paper studies consumption-portfolio decisions with recursive utility on a finite time horizon. We postulate essential properties that a bequest motive must satisfy. We show that the parameter which serves as weight of bequest in setups with time-additive utility is both quantitatively and qualitatively a poor measure of the relative strength of bequest. To obtain realistic distributions between consumption and bequest, this parameter takes extreme values and varies between 0 and $10^{32}$ depending on the calibration of the model. Besides, it violates the monotonicity requirement that the strength of bequest should be positively related to the amount of wealth bequeathed. We thus derive two alternative representations of the bequest motive that are in line with the postulated properties. Our representations are parametrized by the terminal wealth-consumption ratio or a normalized version hereof which serve as the strength of the bequest motive. We obtain clear-cut interpretations of strength.

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

JEL Classification: D14, G11

Suggested Citation

Kraft, Holger and Munk, Claus and Weiss, Farina, Bequest Motives in Consumption-Portfolio Decisions with Recursive Utility (June 29, 2020). 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 Administration
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 Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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