Recursive Preferences and the Value of Life. Theory and Application to Epidemics
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Date
2024-04-03
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Working Paper
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Abstract
This article investigates how recursive preferences can be used in the context of lifecycle models featuring uncertain and endogenous lifespans. We provide representation results showing how recursive preferences may be homothetic or fulfill a simple form of monotonicity with respect to first-order stochastic dominance, also known as ordinal dominance. While homotheticity appears to be very restrictive, constraining the intertemporal elasticity of substitution to be greater than one and risk aversion to be less than one, ordinal dominance points to the risk-sensitive preferences of Hansen and Sargent (1995), on which we focus in the second part of the paper. We then discuss the theoretical impact of risk aversion, and illustrate the relevance of our findings by looking at the consumption-mortality trade-offs faced by a benevolent planner during a pandemic.
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ETH Zurich
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Subject
value of life; ecursive utility; lifecycle models; epidemics
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03877 - Bommier, Antoine / Bommier, Antoine
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