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Effect of Longevity on Saving Behavior: An Experimental Study on the Simple Intertemporal Life-Cycle Problem

Tetsuo Yamamori, Kazuyuki Iwata and Akira Ogawa

No e153, Working Papers from Tokyo Center for Economic Research

Abstract: To examine how the length of retirement life affects people's mistakes in choosing a saving plan, a laboratory experiment was conducted in which subjects face a simple life-cycle consumption/saving problem without interest rate, price and income volatilities, and any uncertainty. Lifetime is divided into working periods with a certain and constant amount of income and retirement periods with no income. We compared three treatment groups: the retirement periods are the last 5 periods out of 25 life periods (SR), these are the last 16 periods out of 36 life periods (LL), and these are the last 16 periods out of 25 life periods (SW). In all treatments, the subject's lifetime income was the same. Our main findings are twofold. First, the magnitude of misconsumption (i.e., the deviation from conditional optimal consumption) is significantly positive for each treatment. Thus, people cannot find an optimal saving plan even in our simple life-cycle problem. Second, the subjects overreacted to both the long life and large income, which caused over-saving behavior in LL and under-saving behavior in SW, whereas there is no particular trend for mistakes in SR.

Pages: 38 pages
Date: 2020-09
New Economics Papers: this item is included in nep-age and nep-exp
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