Who saves more, the naive or the sophisticated agent?

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Authors

Groneck, Max
Ludwig, Alexander
Zimper, Alexander

Journal Title

Journal ISSN

Volume Title

Publisher

Elsevier

Abstract

This paper studies discrete time finite horizon life-cycle models with arbitrary discount functions and iso-elastic per period power utility with concavity parameter. We distinguish between the savings behavior of a sophisticated versus a naive agent. Although both agent types have identical preferences, they solve different utility maximization problems whenever the model is dynamically inconsistent. Pollak (1968) shows that the savings behavior of both agent types is nevertheless identical for logarithmic utility ( = 1). We generalize this result by showing that the sophisticated agent saves in every period a greater fraction of her wealth than the naive agent if and only if ≥ 1. While this result goes through for model extensions that preserve linearity of the consumption policy function, it breaks down for non-linear model extensions.

Description

DATA AVAILABILITY : Data will be made available on request.

Keywords

Life-cycle model, Discount functions, Dynamic inconsistency, Epstein-Zin-Weil preferences, Income risk, SDG-08: Decent work and economic growth

Sustainable Development Goals

SDG-08:Decent work and economic growth

Citation

Groneck, M., Ludwig, A. & Zimper, A. 2024, 'Revisiting the satisfaction-loyalty link in retail banking - an emerging market perspective', Journal of Economic Theory, vol. 219, art. 105848, pp. 1-33. https://DOI.org/10.1016/j.jet.2024.105848.