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Optimal retirement with borrowing constraints and forced unemployment risk

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  • Jang, Bong-Gyu
  • Park, Seyoung
  • Zhao, Huainan

Abstract

In this paper, we study optimal retirement in a two-dimensional incomplete market caused by borrowing constraints and forced unemployment risk. We show that the two aspects jointly affect an individual’s optimal consumption, investment, and retirement strategies. In contrast to the complete market case, the endogenously determined wealth threshold for retirement is significantly affected by the two-dimensional market incompleteness, resulting in a lower wealth threshold. We also discuss a possible unemployment insurance scheme for the borrowing-constrained individual to respond to the shocks of forced unemployment.

Suggested Citation

  • Jang, Bong-Gyu & Park, Seyoung & Zhao, Huainan, 2020. "Optimal retirement with borrowing constraints and forced unemployment risk," Insurance: Mathematics and Economics, Elsevier, vol. 94(C), pages 25-39.
    • Handle: RePEc:eee:insuma:v:94:y:2020:i:c:p:25-39
    DOI: 10.1016/j.insmatheco.2020.06.002
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    3. Luo, Shangzhen & Wang, Mingming & Zhu, Wei, 2022. "Time-inconsistent life-cycle consumption and retirement choice with mortality risk," Applied Mathematics and Computation, Elsevier, vol. 433(C).

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    More about this item

    Keywords

    Optimal retirement; Forced unemployment risk; Borrowing constraints; Dynamic programming; Icomplete market;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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