Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?

2014 ◽  
Vol 6 (1) ◽  
pp. 162-189 ◽  
Author(s):  
Jonathan Huntley ◽  
Valentina Michelangeli
Keyword(s):  
Life Cycle ◽  
Portfolio Choice ◽  
Precautionary Savings ◽  
Financial Assets ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Marginal Propensity To Consume ◽  
Tax Returns ◽  
Marginal Propensity ◽  
Earnings Risk

We build a life-cycle model with earnings risk, liquidity constraints, and portfolio choice over tax-deferred and taxable assets to evaluate how household consumption changes in response to shocks to transitory anticipated income, such as the 2001 income tax rebate. Households optimally invest in tax-deferred assets, which are encumbered by withdrawal penalties, and exchange taxable precautionary savings for higher after-tax returns. The model predicts a higher marginal propensity to consume out of a rebate than is predicted by a standard frictionless life-cycle model. Liquidity-constrained households—with few financial assets or portfolios expensive to reallocate—consume a higher fraction of the rebates. (JEL D91, E21, G11, H24)

The life-cycle model and intertemporal choice

2018 ◽  
Author(s):  
Hans Fehr ◽  
Fabian Kindermann
Keyword(s):  
Life Cycle ◽  
Old Age ◽  
Portfolio Choice ◽  
Intertemporal Choice ◽  
Precautionary Savings ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Risky Assets ◽  
Labour Income ◽  
Uncertain Future

The discussion in the Chapters 3 and 4 centred around static optimization problems.The static general equilibrium model of Chapter 3 features an exogenous capital stock and Chapter 4 discusses investment decisions with risky assets, but in a static context. In this chapter we take a first step towards the analysis of dynamic problems. We introduce the life-cycle model and analyse the intertemporal choice of consumption and individual savings. We start with discussing the most basic version of this model and then introduce labour-income uncertainty to explain different motives for saving. In later sections, we extended the model by considering alternative savings vehicles and explain portfolio choice and annuity demand. Throughout this chapter we follow a partial equilibrium approach, so that factor prices for capital and labour are specified exogenously and not determined endogenously as in Chapter 3. This section assumes that households can only save in one asset. Since we abstract from bequest motives in this chapter, households do save because they need resources to consume in old age or because they want to provide a buffer stock in case of uncertain future outcomes.The first motive is the so-called old-age savings motive while the second is the precautionary savings motive. In order to derive savings decisions it is assumed in the following that a household lives for three periods. In the first two periods the agent works and receives labour income w while in the last period the agent lives from his accumulated previous savings. In order to derive the optimal asset structure a2 and a3 (i.e. the optimal savings), the agent maximizes the utility function . . . U(c1, c2, c3) = u(c1) + βu(c2) + β2u(c3) . . . where β denotes a time discount factor and u(c) = c1−1/γ /1−1/γ describes the preference function with γ ≥ 0 measuring the intertemporal elasticity of substitution.

LIFE INSURANCE AND PENSION CONTRACTS II: THE LIFE CYCLE MODEL WITH RECURSIVE UTILITY

2015 ◽  
Vol 46 (1) ◽  
pp. 71-102 ◽  
Author(s):  
Knut K. Aase
Keyword(s):  
Life Cycle ◽  
Portfolio Choice ◽  
Life Insurance ◽  
Insurance Industry ◽  
Life Time ◽  
Recursive Utility ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Pension Insurance ◽  
The Relationship

AbstractWe analyze optimal consumption and pension insurance during the life time of a consumer using the life cycle model, when the consumer has recursive utility. The relationship between substitution of consumption and risk aversion is highlighted, and clarified by the introduction of this type of preferences. We illustrate how recursive utility can be used to explain the empirical consumption puzzle for aggregates. This indicates a plausible choice for the parameters of the utility function, relevant for the consumer in the life cycle model. Optimal life insurance is considered, as well as the portfolio choice problem related to optimal exposures in risky securities. A major finding is that it is optimal for the typical insurance buyer to smooth adverse shocks to the financial market, unlike what is implied by the conventional model. This has implications for what type of contracts the life and pension insurance industry should offer.

scholarly journals LIFE INSURANCE AND PENSION CONTRACTS I: THE TIME ADDITIVE LIFE CYCLE MODEL

2014 ◽  
Vol 45 (1) ◽  
pp. 1-47 ◽  
Author(s):  
Knut K. Aase
Keyword(s):  
Life Cycle ◽  
Portfolio Choice ◽  
Life Insurance ◽  
Insurance Industry ◽  
Pension Plans ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Pension Insurance ◽  
Insurance Contracts ◽  
State Dependent

AbstractWe analyze optimal consumption in the life cycle model by introducing life and pension insurance contracts. The model contains a credit market with biometric risk, and market risk via risky securities. This idealized framework enables us to clarify important aspects of life insurance and pension contracts. We find optimal pension plans and life insurance contracts where the benefits are state dependent. We compare these solutions both to the ones of standard actuarial theory, and to policies offered in practice. Implications of this include what role the insurance industry may play to improve welfare. The relationship between substitution of consumption and risk aversion is highlighted in the presence of a consumption puzzle. One problem related portfolio choice is discussed the horizon problem. Finally, we present some comments on longevity risk and cohort risk.

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