Subjective Life Expectancies, Time Preference Heterogeneity and Wealth Inequality

Jonna Olsson, Richard Foltyn

Research output: Working paper

Abstract

There is a substantial heterogeneity in life expectancy in the population. However, an individual's consumption-savings decision is not necessarily guided by the objective statistical life expectancy, but rather by the individual's beliefs about survival. In this paper, we document a systematic bias in survival beliefs: individuals with a low survival probability relative to their peers underestimate their life expectancies, while individuals with a high survival probability overestimate theirs. To gauge the effect of heterogeneity in life expectancy (objective and subjective) on savings rates and ultimately wealth inequality, we introduce shocks to survival beliefs into an otherwise standard overlapping-generations model. We show that with a bequest motive calibrated to match asset decumulation in old age, such a model exhibits a counter-factual savings behavior as individuals increase their savings when their life expectancy drops. Nevertheless, the overall wealth inequality in the economy is virtually unaffected by heterogeneity in survival beliefs, contrary to previous literature which finds stronger effects of heterogeneous discount factors.
Original languageEnglish
Publication statusPublished - 1 Aug 2019

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