Time Preference and Life Cycle Consumption with Endogenous Survival
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We provide a structural theory of time preference and derive a functional
form of intertemporal preferences by postulating that individuals make
their life-cycle consumption choices as if to maximize expected lifetime.
This yields a nontime-separable expected utility representation where the
inverse of the coefficient of intertemporal substitution exceeds the
coefficient of relative risk aversion. The rate of time preference depends
on the inverse of expected remaining lifetime and the effect of age on the
productivity of consumption in affecting health. The preference
formulation is applied in a standard intertemporal consumption model to
illustrate the implied life-cycle consumption choices (JEL D91, B41). Copyright 2004, Oxford University Press.
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