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Policy effects in hyperbolic vs. exponential models of consumption and retirement

  • Gustman, Alan L.
  • Steinmeier, Thomas L.

This paper constructs a structural retirement model with hyperbolic preferences and uses it to estimate the effect of several potential Social Security policy changes. Estimated effects of policies are compared using two models, one with hyperbolic preferences and one with standard exponential preferences. Sophisticated hyperbolic discounters may accumulate substantial amounts of wealth for retirement. We find it is frequently difficult to distinguish empirically between models with the two types of preferences on the basis of asset accumulation paths or consumption paths around the period of retirement. Simulations suggest that, despite the much higher initial time preference rate, individuals with hyperbolic preferences may actually value a real annuity more than individuals with exponential preferences who have accumulated roughly equal amounts of assets. This appears to be especially true for individuals with relatively high time preference rates or who have low assets for whatever reason. This affects the tradeoff between current benefits and future benefits on which many of the retirement incentives of the Social Security system rest.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 96 (2012)
Issue (Month): 5 ()
Pages: 465-473

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Handle: RePEc:eee:pubeco:v:96:y:2012:i:5:p:465-473
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  2. Hanming Fang & Dan Silverman, 2007. "Time-Inconsistency and Welfare Program Participation: Evidence from the NLSY," NBER Working Papers 13375, National Bureau of Economic Research, Inc.
  3. Coile, Courtney & Diamond, Peter & Gruber, Jonathan & Jousten, Alain, 2002. "Delays in claiming social security benefits," Journal of Public Economics, Elsevier, vol. 84(3), pages 357-385, June.
  4. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
  5. James M. Poterba & Steven F. Venti & David A. Wise, 2011. "Family Status Transitions, Latent Health, and the Post-Retirement Evolution of Assets," NBER Chapters, in: Explorations in the Economics of Aging, pages 23-69 National Bureau of Economic Research, Inc.
  6. van der Klaauw, Wilbert & Wolpin, Kenneth I., 2008. "Social security and the retirement and savings behavior of low-income households," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 21-42, July.
  7. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2004. "Are Americans Saving "Optimally" for Retirement?," NBER Working Papers 10260, National Bureau of Economic Research, Inc.
  8. Eric French & John Bailey Jones, 2011. "The Effects of Health Insurance and Self‐Insurance on Retirement Behavior," Econometrica, Econometric Society, vol. 79(3), pages 693-732, 05.
  9. Alan L. Gustman & Thomas L. Steinmeier, 2010. "Policy Effects in Hyperbolic vs. Exponential Models of Consumption and Retirement," NBER Working Papers 16503, National Bureau of Economic Research, Inc.
  10. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  11. Alan L. Gustman & Thomas Steinmeier, 2008. "How Changes in Social Security Affect Recent Retirement Trends," NBER Working Papers 14105, National Bureau of Economic Research, Inc.
  12. Gustman, Alan L & Steinmeier, Thomas L, 1986. "A Structural Retirement Model," Econometrica, Econometric Society, vol. 54(3), pages 555-84, May.
  13. Alan L. Gustman & Thomas L. Steinmeier, 2002. "Retirement and the Stock Market Bubble," NBER Working Papers 9404, National Bureau of Economic Research, Inc.
  14. Hanming Fang & Yang Wang, 2010. "Estimating Dynamic Discrete Choice Models with Hyperbolic Discounting, with an Application to Mammography Decisions," NBER Working Papers 16438, National Bureau of Economic Research, Inc.
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