Intertemporal choice with health-dependent discounting

In this paper I discuss a standard model of life cycle consumption behavior when the discount rate depends on the state of health and health deteriorates with increasing age. I show that this feature allows the introduction of time-consistent discounting at a non-constant rate and to model, in a convenient way, the notion that individuals discount future payoffs at higher rates when the risk of death increases. I show that the model generates an empirically plausible age-consumption pattern even when perfect annuity markets exist. •A new theory of time-variant discount rates.•Discount rates depend on the state of health.•Theory explains how time-consistent decisions are possible with non-constant discount rates.•Theory explains a hump-shaped age-consumption profile.