Recursive Preferences, the Value of Life, and Household Finance
Abstract: We analyze lifecycle saving using a recursive utility model calibrated to match 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 while disentangling risk aversion and the intertemporal elasticity of substitution. We show that, with a positive value of life, risk aversion reduces each of savings, stock market participation, and annuity purchase. Risk averse agents insure against early death by consuming more when young and retaining wealth for bequests. These results contrast with those of previous studies using non-monotonic recursive models.
This is joint work with François Le Grand, Cormac O’Dea and Daniel Harenberg.