Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality

74 Pages Posted: 2 Aug 2021 Last revised: 1 Nov 2021

See all articles by Richard Foltyn

Richard Foltyn

University of Glasgow

Jonna Olsson

University of Edinburgh

Date Written: October 31, 2021

Abstract

This paper examines how objective and subjective heterogeneity in life expectancy affects savings behavior of healthy and unhealthy people. Using data from the Health and Retirement Study, we first document systematic biases in survival beliefs across self-reported health: those in poor health not only have a shorter actual lifespan but are also more pessimistic about their remaining life time. To gauge the effect on savings behavior and wealth accumulation, we then use an overlapping-generations model where survival probabilities and beliefs evolve according to a health and survival process estimated from data. We conclude that differences in life expectancy can explain one fifth of the differences in accumulated wealth and that pessimism among the unhealthy plays an important role.

Keywords: Life expectancy, preference heterogeneity, subjective beliefs, life cycle

JEL Classification: D15, E21, G41, I14

Suggested Citation

Foltyn, Richard and Olsson, Jonna, Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality (October 31, 2021). Available at SSRN: https://ssrn.com/abstract=3895119 or http://dx.doi.org/10.2139/ssrn.3895119

Richard Foltyn (Contact Author)

University of Glasgow

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Jonna Olsson

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

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