CFDP 2231R

Recursive Preferences, the Value of Life, and Household Finance

Author(s): 

Publication Date: May 2020

Revision Date: December 2020

Pages: 41

Abstract: 

We analyze lifecycle saving strategies using a recursive utility model calibrated to match empirical estimates of the value of a statistical life. The novelty of our approach is that we require preferences to be monotone with respect to first order stochastic dominance. The framework we use can disentangle risk aversion and the intertemporal elasticity and can feature a positive value of life without placing constraints on the value of the risk aversion parameter or the intertemporal elasticity of substitution. We show that, with a positive value of life, risk aversion reduces savings, decreases stock market participation and decreases 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. The model can rationalize low annuity demand while also matching empirically documented levels of wealth and private investments in stocks.

Supplemental material

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

JEL Classification Codes: D91, G11, J14, J17

JEL Classification Codes: D91G11J14J17

See CFDP Version(s): CFDP 2231