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Retirement Choices in Italy: What an Option Value Model Tells Us

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  • Michele Belloni
  • Rob Alessie

Abstract

Using Italian data, we estimate an option value model to quantify the effectof financial incentives on retirement choices. As far as we know, this isthe first empirical study to estimate the conditional multiple-years modelput forward by Stock and Wise (1990). This implies that we account fordynamic self-selection bias. We also present an extended version of thismodel in which the marginal value of leisure is random.The models yield plausible estimates of the preference parameters. Dynamicself-selection results in a considerable downward bias in the estimate of themarginal utility of leisure. We perform a simulation study to gauge theeffects of a dramatic pension reform. Underestimation of the value of leisuretranslates into sizeable over-prediction of the impact of reform. For thefemale sample, the model is able to predict almost perfectly the age-specifichazard rates. For the male sample, we obtain a good fit. Results for malesshould, however, be interpreted with caution since we are not able to fullycorrect for dynamic self-selection bias.

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 75 (2013)
Issue (Month): 4 (08)
Pages: 499-527

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Handle: RePEc:bla:obuest:v:75:y:2013:i:4:p:499-527

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  1. Colombino, Ugo & Hernæs, Erik & Jia, Zhiyang & Strom, Steinar, 2003. "Retirement in Italy and Norway," Memorandum, Oslo University, Department of Economics 10/2003, Oslo University, Department of Economics.
  2. Rob Euwals & Daniel van Vuuren & Ronald Wolthoff, 2005. "Early retirement behaviour in the Netherlands; evidence from a policy reform," CPB Discussion Paper 52, CPB Netherlands Bureau for Economic Policy Analysis.
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  5. Moller Dano, Anne & Ejrnaes, Mette & Husted, Leif, 2005. "Do single women value early retirement more than single men?," Labour Economics, Elsevier, Elsevier, vol. 12(1), pages 47-71, February.
  6. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1992. "Three Models of Retirement: Computational Complexity versus Predictive Validity," NBER Chapters, in: Topics in the Economics of Aging, pages 21-60 National Bureau of Economic Research, Inc.
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  13. Agar Brugiavini & Vincenzo Galasso, 2003. "The Social Security Reform Process in Italy: Where do We Stand?," Working Papers, University of Michigan, Michigan Retirement Research Center wp052, University of Michigan, Michigan Retirement Research Center.
  14. M. Belloni & R. Alessie, 2008. "The Importance of Financial Incentives on Retirement Choices: New Evidence for Italy," Working Papers, Utrecht School of Economics 08-10, Utrecht School of Economics.
  15. Richard V. Burkhauser & J. S. Butler & Gulcin Gumus, 2004. "Dynamic programming model estimates of Social Security Disability Insurance application timing," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(6), pages 671-685.
  16. Burkhauser, Richard V. & Butler, J. S. & Gumus, Gulcin, 2003. "Option Value and Dynamic Programming Model Estimates of Social Security Disability Insurance Application Timing," IZA Discussion Papers 941, Institute for the Study of Labor (IZA).
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Cited by:
  1. Peri, Giovanni & Romiti, Agnese & Rossi, Mariacristina, 2013. "Immigrants, Household Production and Women's Retirement," IZA Discussion Papers 7549, Institute for the Study of Labor (IZA).
  2. Li, Jinjing & O'Donoghue, Cathal, 2011. "Retirement Choice Simulation in Household Settings with Heterogeneous Pension Plans," IZA Discussion Papers 5866, Institute for the Study of Labor (IZA).

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