Get access

THE RISK-FREE RATE IN A FINITE HORIZON MODEL WITH BEQUESTS

Authors


  • The authors thank two anonymous referees and the participants of the Macro Workshop at the Beijing University for useful comments. All remaining errors are our own. This paper is sponsored by National Science Foundation for Distinguished Young Scholars of China under project 70725006 and the Young Scientists Fund under project 71103208.

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.

Get access to the full text of this article

Ancillary