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A Comparison Of Discrete And Parametric Methods For Continuous-State Dynamic Programming Problems

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Author Info
Hugo Benitez-Silva (Yale University)
John Rust (Yale University)
Gunter Hitsch (Yale University)
Giorgio Pauletto (University of Geneva)
George Hall (Yale University)

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Abstract

This paper presents a dynamic model of the joint labor/leisure and consumption/saving decision over the life cycle. Such a dynamic model provides a framework for considering the important policy experiments related to the reforms in Social Security. We address the role of labor supply in a life cyle utility maximization model formally, building upon recent work by Low (1998), and extending the classical optimal lifetime consumption problem under uncertainty first formalized in Phelps (1962) and later in Hakansson (1970). We begin by solving the finite horizon consumption/saving problem analytically and numerically and compare the two solutions. We also simulate this benchmark model. Once the labor choice is considered, the stochastic dynamic programming utility maximization problem of the individual is solved numerically, since analytical solutions are infeasible when the individual is maximizing utility over consumption and leisure, given non-linear marginal utility. We show how such a model captures changes in labor supply over the life cycle and that simulated consumption and wealth accumulation paths are consistent with empirical evidence. We also present a model of endogenously determined annuities in a consumption/saving framework under capital uncertainty and in the presence of bequest motives.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 24.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:24

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Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain
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  1. Victor Aguirregabiria & Pedro mira, 2007. "Dynamic Discrete Choice Structural Models: A Survey," Working Papers tecipa-297, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  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. [Downloadable!]
  3. Nair, Harikesh, S., 2006. "Intertemporal Price Discrimination with Forward-Looking Consumers: Application to the US Market for Console Video-Games," Research Papers 1947, Stanford University, Graduate School of Business. [Downloadable!]
    Other versions:
  4. George Hall & John Rust, 2002. "Econometric Methods for Endogenously Sampled Time Series: The Case of Commodity Price Speculation in the Steel Market," NBER Technical Working Papers 0278, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. S. Boragan Aruoba & Jesus Fernandez-Villaverde & Juan Francisco Rubio-Ramirez, 2003. "Comparing solution methods for dynamic equilibrium economies," Working Paper 2003-27, Federal Reserve Bank of Atlanta. [Downloadable!]
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  6. Hugo Benitez-Silva, 2002. "Job Search Behavior At The End Of The Life Cycle," Working Papers, Center for Retirement Research at Boston College 2002-10, Center for Retirement Research. [Downloadable!]
  7. Hugo Benitez-Silva, 2001. "A Dynamic Model of Job Search Behavior over the Life Cycle with Empirical Applications," Computing in Economics and Finance 2001 100, Society for Computational Economics.
  8. Igal Hendel & Aviv Nevo, 2005. "Measuring the Implications of Sales and Consumer Inventory Behavior," NBER Working Papers 11307, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Manuel Santos & John Rust, . "Convergence Properties of Policy Iteration," Working Papers 2133377, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
  10. 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. [Downloadable!]
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