Bequest Motives in Consumption-Portfolio Decisions with Recursive Utility

This paper studies consumption-portfolio decisions with recursive utility on a finite time horizon. We postulate essential properties that a bequest motive must satisfy. We show that the parameter which serves as weight of bequest in setups with time-additive utility is both quantitatively and qualitatively a poor measure of the relative strength of bequest. To obtain realistic distributions between consumption and bequest, this parameter takes extreme values and varies between 0 and $10^{32}$ depending on the calibration of the model. Besides, it violates the monotonicity requirement that the strength of bequest should be positively related to the amount of wealth bequeathed. We thus derive two alternative representations of the bequest motive that are in line with the postulated properties. Our representations are parametrized by the terminal wealth-consumption ratio or a normalized version hereof which serve as the strength of the bequest motive. We obtain clear-cut interpretations of strength