Recursive Preferences, the Value of Life, and Household Finance

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