Optimal retirement with borrowing constraints and forced unemployment risk

Bong-Gyu Jang, Seyoung Park and Huainan Zhao

Insurance: Mathematics and Economics, 2020, vol. 94, issue C, 25-39

Abstract: In this paper, we study optimal retirement in a two-dimensional incomplete market caused by borrowing constraints and forced unemployment risk. We show that the two aspects jointly affect an individual’s optimal consumption, investment, and retirement strategies. In contrast to the complete market case, the endogenously determined wealth threshold for retirement is significantly affected by the two-dimensional market incompleteness, resulting in a lower wealth threshold. We also discuss a possible unemployment insurance scheme for the borrowing-constrained individual to respond to the shocks of forced unemployment.

Keywords: Optimal retirement; Forced unemployment risk; Borrowing constraints; Dynamic programming; Icomplete market (search for similar items in EconPapers)
JEL-codes: C61 E21 G11 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:94:y:2020:i:c:p:25-39

DOI: 10.1016/j.insmatheco.2020.06.002

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