A life insurance model with asymmetric time preferences

Abstract

We build a life insurance model in the tradition of Richard (1975) and Pliska and Ye (2007). Two agents purchase life insurance by continuously paying two premiums. At the random time of death of an agent, the life insurance payment is added to the household wealth to be used by the other agent. We allow for the agents to discount future utilities at different rates, which implies that the household has inconsistent time preferences. To solve the model, we employ the equilibrium of Ekeland and Lazrak (2010), and we derive a new dynamic programming equation which is designed to find this equilibrium for our model. The most important contribution of the paper is to combine the issue of inconsistent time preferences with the presence of several agents. We also investigate the sensitivity of the behaviors of the agents to the parameters of the model by using numeric analysis. We find, among other things, that while the purchase of life insurance of one agent increases in her own discount rate, it decreases in the discount rate of the other agent.