A Neoclassical Growth Model with Endogenous Retirement

Kiminori Matsuyama

No CIRJE-F-174, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper extends Diamond (1965)'s one-sector neoclassical growth model with two-period lived, overlapping generations, by allowing the agents to make the labor force participation decision in their second period, in the spirit of Feldstein (1974). If the agents earn a high wage income when young, they choose to retire when old. This reduces the labor supply (through a lower participation rate of the elderly) and stimulates capital accumulation (through saving for retirement). The resulting high capital-labor ratio leads to a higher wage income for the next generation. If the agents earn a low wage income when young, they continue to work when old and save little, which implies a low capital-labor ratio and a low wage income for the next generation. Due to such positive feedback mechanisms, the endogeneity of retirement magnifies the persistence of growth dynamics, thereby slowing down a convergence to the steady state, and even generating multiple steady states for empirically plausible parameter values.

Pages: 28 pages
Date: 2002-09
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2002cf174

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