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THE RISK‐FREE RATE IN A FINITE HORIZON MODEL WITH BEQUESTS
Author(s) -
Cui Xiaoyong,
Gong Liutang
Publication year - 2015
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.2012.00456.x
Subject(s) - economics , bequest , elasticity of substitution , time preference , consumption (sociology) , overlapping generations model , context (archaeology) , microeconomics , elasticity of intertemporal substitution , interest rate , econometrics , monetary economics , production (economics) , paleontology , social science , sociology , political science , law , biology
ABSTRACT This paper studies the risk‐free rate in an overlapping generations economy with bequests. It is shown that the risk‐free rate depends on risk aversion, the elasticity of intertemporal substitution, the share of wealth invested in human wealth, life expectancy, and the preference for bequests. In a standard life‐cycle context, mortality increases the subjective time rate of discount, and thus increases the compensation required to postpone consumption. This latter effect is offset in a bequest‐driven model of the type considered here, leading to much more powerful income effects. In this sense, the model provides a bequest‐motive explanation for the risk‐free rate puzzle put forward by Weil in 1989.