A Life-Cycle Model with Ambiguous Survival Beliefs

24 October 2014
Publication Type: Working Paper
JEL Code: D83, D91, E21

On average, young people underestimate whereas old people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is em-bedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.

Series title: Working paper 473
1 October 2014
Journal: Journal of Economic Theory
1 March 2016
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