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Wealth effects and the consumption of leisure: retirement decisions during the stock market boom of the 1900s

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  • Julia Lynn Coronado & Maria Perozek
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    Abstract

    It is well accepted that households increase consumption of goods and services in response to an unexpected increase in wealth. Consensus estimates of this wealth effect are in the range of 3 to 5 cents of additional consumption spending in the long run for each additional dollar of wealth. Economic theory also suggests that consumption of leisure, like consumption of goods and services, should increase with positive shocks to wealth. In this paper, we ask whether the run-up in equity prices during the 1990s led older workers to retire earlier than they had previously planned. We identify the effect by exploiting unique data on retirement expectations from the Health and Retirement Survey. Our econometric results suggest that respondents who held corporate equity immediately prior to the bull market of the 1990s retired, on average, 7 months earlier than other respondents.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-20.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedgfe:2003-20

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    Keywords: Stock market ; Retirement ; Wealth;

    References

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    1. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
    2. Dean M. Maki & Michael G. Palumbo, 2001. "Disentangling the wealth effect: a cohort analysis of household saving in the 1990s," Finance and Economics Discussion Series 2001-21, Board of Governors of the Federal Reserve System (U.S.).
    3. Sewin Chan & Ann Huff Stevens, 2001. "Retirement Incentives and Expectations," NBER Working Papers 8082, National Bureau of Economic Research, Inc.
    4. Ing-Haw Cheng & Eric French, 2000. "The effect of the run-up in the stock market on labor supply," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 48-65.
    5. B. Douglas Bernheim, 1989. "The Timing of Retirement: A Comparison of Expectations and Realizations," NBER Chapters, in: The Economics of Aging, pages 335-358 National Bureau of Economic Research, Inc.
    6. Andrew A. Samwick, 1998. "New Evidence on Pensions, Social Security, and the Timing of Retirement," NBER Working Papers 6534, National Bureau of Economic Research, Inc.
    7. Hugo Benitez-Silva & Debra Dwyer, 2002. "Retirement Expectations Formation Using the Health and Retirement Study," Department of Economics Working Papers 02-04, Stony Brook University, Department of Economics, revised 18 Jun 2002.
    8. F. Thomas Juster & Joseph P. Lupton & James P. Smith & Frank Stafford, 2006. "The Decline in Household Saving and the Wealth Effect," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 20-27, February.
    9. Alan L. Gustman & Thomas L. Steinmeier, 1983. "A Structural Retirement Model," NBER Working Papers 1237, National Bureau of Economic Research, Inc.
    10. David Joulfaian & Mark O. Wilhelm, 1994. "Inheritance and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 29(4), pages 1205-1234.
    11. Alan L. Gustman & Thomas L. Steinmeier, 2000. "Retirement Outcomes in the Health and Retirement Study," NBER Working Papers 7588, National Bureau of Economic Research, Inc.
    12. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1993. "The Carnegie Conjecture: Some Empirical Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 413-35, May.
    13. Purvi Sevak, 2002. "Wealth Shocks and Retirement Timing: Evidence from the Nineties," Working Papers wp027, University of Michigan, Michigan Retirement Research Center.
    14. Michael Hurd & Monika Reti, 2003. "The Effects of Large Capital Gains on Work and Consumption: Evidence from Four Waves of the HRS," Working Papers 03-14, RAND Corporation Publications Department.
    15. James H. Stock & David A. Wise, 1988. "Pensions, The Option Value of Work, and Retirement," NBER Working Papers 2686, National Bureau of Economic Research, Inc.
    16. Guido W. Imbens & Donald B. Rubin & Bruce I. Sacerdote, 2001. "Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players," American Economic Review, American Economic Association, vol. 91(4), pages 778-794, September.
    17. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
    18. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
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    Cited by:
    1. J. Ignacio Conde-Ruiz & Vincenzo Galasso & Paola Profeta, 2006. "Early Retirement and Social Security: A Long Term Perspective," CSEF Working Papers 165, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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