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Theoretical Aspects of Retirement Decisions

Miroslav Verbič ()

Microeconomics from EconWPA

Abstract: Paper presents a survey of five different approaches to retirement decision analysis. Simple life cycle labour supply model leads to a classical optimization problem of choice between work and leisure, but it is highly limited in explaining retirement decision as a static approach. Comparative static version of this model enables the determination of income, wealth and social security on retirement decisions, but does not include neither the preference parameters of the individual or the expected value of future income flows. Merely the first problem can be solved by the reservation wage approach, but both problems are soluble by implementing a dynamic programming model. As an alternative to the latter, an option value approach is also discussed, which highly decreases the complexity, but does not lose a lot of reliability of the dynamic programming model.

Keywords: ageing; dynamic programming model; early retirement; income effect; labour force participation; life cycle labour supply model; option value approach; pension; reservation wage; retirement decision; social security; substitution effect (search for similar items in EconPapers)
JEL-codes: C2 C3 D11 D12 J26 (search for similar items in EconPapers)
Date: 2002-01-30
Note: Type of Document - Adobe PDF; prepared on IBM PC; to print on HP; pages: 40; figures: included. Paper is in Slovenian language. Available also in English language (contact author).
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