Bounded rationality and optimal retirement age

Hyeon Park

Journal of Economic Dynamics and Control, 2023, vol. 154, issue C

Abstract: This paper explores a lifecycle model of labor supply and endogenous retirement behavior for households whose planning window is truncated and who will reoptimize as extra information on productivity is revealed over time. This short horizon model internalizes the restriction on temporal resource allocation, and the labor supply is closely dependent on the degree of productivity changes in view. With the model, the retirement timing—the moment at which the marginal value from the expected resources drops below a threshold—evolves according to the planning window. Using a discrete time overlapping generations framework with leisure substitutability, in which the constraint on time is explicitly added, I demonstrate that the calibrated model economy reasonably replicates the salient facts regarding lifecycle labor supply and retirement behaviors without a borrowing constraint commonly found in models of leisure-consumption substitutability. Furthermore, this result is robust to sensitivity check. With the extended environment of mortality risks and bequests, this paper explicitly quantifies the relationship among retirement age, planning horizon, equilibrium bequests and other lifecycle characteristics from the calibrated general equilibrium.

Keywords: Bounded rationality; Endogenous retirement; Reoptimization; General equilibrium (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:154:y:2023:i:c:s0165188923001094

DOI: 10.1016/j.jedc.2023.104703

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