Economic Development with Endogenous Retirement

Kiminori Matsuyama

No 1237, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper endogenizes the elderly's labor force participation in an overlapping generations economy under the assumption that retirement is a luxury. In a developed economy, the agents earn a high wage income when young and retire when old. This reduces the labor supply (through a low participation rate of the elderly), and stimulates capital accumulation (through saving for retirement). The resulting high capital-labor ration leads to a higher wage income for the next generation. In a poor economy, the agents continue to work when old and saves little, which implies a low capital-labor ration and a low wage income for the next generation. Due to such a positive feedback mechanism, the endogeneity of retirement magnifies the persistence of growth dynamics, thereby slowing down a convergence to the steady state, and evene generating multiple steady states for empirically plausible parameter values.

Keywords: Economic Development and Labor force participation rate of the elderly; Labor Supply Effects of Retirement; Saving Effects of Retirement; Persistence in Capital Accumulation; Magnification Effect; Multiple Steady States (search for similar items in EconPapers)
JEL-codes: O11 (search for similar items in EconPapers)
Date: 1998-08
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