Recursive Preferences, the Value of Life, and Household Finance

55 Pages Posted: 6 May 2020 Last revised: 26 May 2020

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

Cormac O’Dea

Institute for Fiscal Studies (IFS)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2020

Abstract

We analyze lifecycle saving strategies using a recursive utility model calibrated to match empirical estimates for the value of a statistical life. We show that, with a positive value of life, risk aversion reduces savings and annuity purchase. Risk averse agents are willing to make an early death a not-so-adverse outcome by enjoying greater consumption when young and bequeathing wealth in case of death. We also find that greater risk aversion lowers stock market participation. We show that this model can rationalize low annuity demand while also matching empirically documented levels of wealth and private investments in stocks. Our findings stand in contrast to studies that implicitly assume a negative value of life.

Keywords: Recursive utility, Lifecycle model, Value of life, Risk aversion, Saving choices, Portfolio choices, Annuity puzzle

JEL Classification: D91, G11, J14, J17

Suggested Citation

Bommier, Antoine and Harenberg, Daniel and Le Grand, François and O’Dea, Cormac, Recursive Preferences, the Value of Life, and Household Finance (May 1, 2020). Cowles Foundation Discussion Paper No. 2231, Available at SSRN: https://ssrn.com/abstract=3592883 or http://dx.doi.org/10.2139/ssrn.3592883

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

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Cormac O’Dea (Contact Author)

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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