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Call for Papers: PIER Research Workshop 2025
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Discussion Paperdp
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Year
2025
2024
2023
2022
...
8 February 2023
20231675814400000
No. 198

Age-Dependent Risk Aversion: Re-evaluating Fiscal Policy Impacts of Population Aging

Abstract

The integration of age-dependent increasing risk aversion (IRA) into an overlapping generations model (OLG) with risk-sensitive preferences provides a more comprehensive understanding of risk aversion, life-cycle behavior, and welfare under uncertainties. A quantitative analysis shows that IRA individuals accumulate more precautionary savings and adjust working hours to mitigate income shocks. However, this mitigation of uncertainty entails a cost of reduced resources, which could have otherwise been used to increase overall consumption of goods and leisures. Three alternative policies to address the challenges posed by aging are evaluated: increasing a payroll tax rate, reducing pension benefits, and extending the retirement age. The results show that individuals who expect to become more risk averse in old age may prefer the payroll tax rate increase, as the other two options results in relatively higher income uncertainty, which contradicts the results of previous studies that assumed constant risk aversion (CRA).

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JEL: D15D81E62J11
Tags: overlapping generations modelfiscal sustainabilitydemographic changesincreasing risk aversionnon-expected utility
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Phitawat Poonpolkul
Phitawat Poonpolkul
Puey Ungphakorn Institute for Economic Research

Puey Ungphakorn Institute for Economic Research

273 Samsen Rd, Phra Nakhon, Bangkok 10200

Phone: 0-2283-6066

Email: pier@bot.or.th

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