Welfare cost of suboptimal allocations under recursive settings (original) (raw)

Abstract

We first investigate a household's asset allocation, housing and consumption decisions with a multi-period model under recursive utility function. We obtain both the analytical and numerical solutions for the optimal policies. We focus just on the period after retirement. In light of the empirical evidence that the elderly people do not down-size or liquidate their housing, we assume that the household buys a house initially and then keeps it until he dies. Our analysis indicates that the composition of the liquid portfolio between stocks and bonds do not depend on the elasticity of intertemporal substitution or the weight of housing in utility parameters. We find that optimal decisions of the household depend on intertemporal elasticity of substitution, risk aversion, weight of housing in utility and characteristics of the financial assets. Our calibrated model can generate empirically documented consumption patterns of the elderly homeowners. Second, we analyze and quantify th...

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