Can preferences for catastrophe avoidance reconcile social discounting with intergenerational equity?

A social welfare function treating all generations equally is derived from a set of axioms that allow for preferences for catastrophe avoidance or risk equity. Implications for the case where there is a risk of world extinction are studied. We show that substantial time discounting can arise from the planner’s taste for catastrophe avoidance, even if the probability of the world ending is infinitesimally small. We wish to thank Marc Fleurbaey, Thibault Gajdos, two anonymous referees and an associate editor for many valuable comments.     

The impact of risk aversion and ambiguity aversion on annuity and saving choices

Journal of Risk and Uncertainty - We analyze the impact of risk aversion and ambiguity aversion on the competing demands for annuities and bequeathable savings using a lifecycle recursive utility...     

Too risk averse to purchase insurance?

This paper suggests a new explanation for the low level of annuitization, which is valid even if one assumes perfect markets. We show that, as soon there is a positive bequest motive, sufficiently risk averse individuals should not purchase annuities. A model calibration accounting for lifetime risk aversion generates a significantly smaller willingness-to-pay for annuities than the one generated by a standard time-additive model. Moreover, the calibration predicts that riskless savings finance one third of consumption, in line with empirical findings.     

LIFE‐CYCLE PREFERENCES REVISITED

An axiomatic construction for life‐cycle preferences accounting for the finiteness and the randomness of life duration is provided. We emphasize the role of intertemporal correlation aversion and explain why multiplicative preferences provide an interesting alternative to additive preferences, allowing risk aversion and intertemporal elasticity of substitution to be separated. Implications regarding the shape of the optimal consumption profiles are discussed.     

Who Wins and Who Loses? Public Transfer Accounts for US Generations Born 1850 to 2090

Public transfer programs in industrial countries are thought to benefit the elderly through pension and health care programs at the expense of the young and future generations. This intergenerational picture changes, however, if public education is also considered as a transfer program. We calculate the net present value at birth of benefits received minus taxes paid for US generations born 1850 to 2090. Surprisingly, all generations 1950 to 2050 are net gainers, while many current elderly are net losers. Windfall gains from starting Social Security and Medicare partially offset windfall losses from starting public education, roughly consistent with the arguments of Becker and Murphy.     

RISK AVERSION AND PLANNING HORIZONS

A number of empirical studies seem to reject the additive separability of preferences that is assumed in most theoretical models of the life cycle. We show that, when additive separability is abandoned and interactions between consumptions at different dates are taken into account, an interesting relation emerges between risk aversion and length of the planning horizon. Specifically, we show that when consumptions at different dates are specific substitutes, risk aversion increases with horizon length. This may explain the surprising empirical finding that individuals seem to increase the share of wealth held in risky assets as they become older. (JEL: D11, D91, G11)     

Overlapping generations models with realistic demography

This paper revisits the literature on overlapping generations models in the demographic context of a continuous age distribution and a general age schedule of mortality. We show that most of the static results known for the 3 or N age-group models can be extended to the continuous model. Some results, previously established for economies without capital, are extended to productive economies. We also make some progress on the existence of some steady states as well as on the dynamic properties. Received: 27 March 2000/Accepted: 25 April 2001