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Labor Supply Flexibility and Portfolio Choice

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Author Info

  • Zvi Bodie
  • William Samuelson

Abstract

This paper develops a model showing that people who have flexibility in choosing how much to work will prefer to invest substantially more of their money in risky assets than if they had no such flexibility. Viewed in this way, labor supply flexibility offers insurance against adverse investment outcomes. The model provides support for the conventional wisdom that the young can tolerate more risk in their investment portfolios than the old. The model has other implications for the study of household financial behavior over the life cycle. It implies that households will take account of the value of labor supply flexibility in deciding how much to invest in their own human capital and when to retire. At the macro level it implies that people will have a labor supply response to shocks in the financial markets.

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File URL: http://www.nber.org/papers/w3043.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3043.

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Date of creation: Jul 1989
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Publication status: Published as "Labor Supply Flexibility and Portfolio Choice in a Life Cycle Model", JEDC, Vol. 16, nos. 3/4 (1992): 427-450.
Handle: RePEc:nbr:nberwo:3043

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  1. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  2. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
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Citations

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Cited by:
  1. James M. Poterba & Joshua Rauh & Steven F. Venti & David A. Wise, 2009. "Lifecycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth," NBER Chapters, in: Developments in the Economics of Aging, pages 15-50 National Bureau of Economic Research, Inc.
  2. Hugo Benitez-Silva, 2000. "A Dynamic Model Of Labor Supply, Consumption/Saving, And Annuity Decisions Under Uncertainty," Computing in Economics and Finance 2000 128, Society for Computational Economics.
  3. James M. Poterba & Andrew A. Samwick, 1997. "Household Portfolio Allocation Over the Life Cycle," NBER Working Papers 6185, National Bureau of Economic Research, Inc.
  4. Campbell, John, 2006. "Household Finance," Scholarly Articles 3157877, Harvard University Department of Economics.
  5. Hugo Benítez-Silva, 2003. "Labor Supply Flexibility and Portfolio Choice: An Empirical Analysis," Working Papers wp056, University of Michigan, Michigan Retirement Research Center.
  6. Adeline Delavande & Susann Rohwedder, 2011. "Individuals' uncertainty about future social security benefits and portfolio choice," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 498-519, 04.
  7. Hugo Benitez-Silva, 2000. "A Dynamic Model of Labor Supply, Consumption/Saving, and Annuity Decisions under Uncertainty," Department of Economics Working Papers 00-06, Stony Brook University, Department of Economics.
  8. Hugo Benítez-Silva, 2003. "The Annuity Puzzle Revisited," Working Papers wp055, University of Michigan, Michigan Retirement Research Center.
  9. Masahiko Egami & Hideki Iwaki, 2007. "An optimal life insurance policy in the investment-consumption problem in an incomplete market," Papers 0801.0195, arXiv.org, revised May 2011.

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