The Structure of Intertemporal Preferences under Uncertain Lifetime
نویسنده
چکیده
Does experimental evidence of the common difference effect imply that intertemporal preferences are time inconsistent? Do these features of choice suggest inherent characteristics of preferences, or could they be traced to an underlying factor that shapes the environment? The effect of uncertain lifetime on intertemporal preferences is studied. A demographic model that allows for unobservable heterogeneity in frailty (risk of mortality) accommodates the common difference effect, even in the presence of stationarity and time consistency. Furthermore, uncertain lifetime transforms any consumption path into a series of lotteries over consumption. If preferences are disproportionately sensitive to certainty, which is a key feature of present consumption, choices will be time inconsistent. JEL Classification: D81, D91
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