How does consumption habit affect the household’s demand for life-contingent claims?

Friday, January 11, 2019 - 2:00pm
Location: 
Wexler 103

Speaker

Pengyu Wei
Senior Research Associate
UNSW Business School
University of New South Wales

Abstract

This paper examines the impact of habit formation on demand for life-contingent claims. We propose a life-cycle model with habit formation and solve the optimal consumption, portfolio choice, and life insurance/annuity problem analytically. We illustrate the mechanism how consumption habit can alter the bequest motive and therefore drive the demand for life-contingent products. Finally, we use our model to examine the mismatch in the life insurance market between the life insurance holdings of most households and their underlying financial vulnerabilities, and the mismatch in the annuity market between the lack of any annuitization and the risk of outliving financial wealth.

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