SCENARIO ANALYSIS WITH RECURSIVE UTILITY: DYNAMIC CONSUMPTION PLANS FOR CHARITABLE ENDOWMENTS

Stephen Satchell and Susan Thorp

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We determine optimal consumption paths under a series of returns scenarios for charitable endowments with distinct tastes over investment risk and inter-temporal substitution. Charities typically prefer smooth consumption paths but are investmentrisk tolerant. Using a recursive, Kreps-Porteus utility function, we model the optimal disbursement from an infinitely-lived charitable trust, then, allowing a general form for the returns density, we apply stochastic dominance relations to estimate income/substitution effects whereby a change in future returns influences the current consumption rate. The elasticity of intertemporal substitution rather than risk aversion is key: optimal consumption rises or falls as the elasticity diverges from one.

JEL-codes: D81 D91 G00 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2008-01
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Related works:
Working Paper: Scenario Analysis with Recursive Utility: Dynamic Consumption Plans for Charitable Endowments (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2008-03

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