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Policy Effects in Hyperbolic vs. Exponential Models of Consumption and Retirement

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  • Alan L. Gustman
  • Thomas L. Steinmeier

Abstract

This paper constructs a structural retirement model with hyperbolic preferences and uses it to estimate the effect of several potential policy changes. Estimated effects of policies are compared under hyperbolic and 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. The simulations also 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. Simulations involving increasing the early entitlement age and increasing the delayed retirement credit do not show a great deal of difference whether exponential or hyperbolic preferences are used, but simulations for eliminating the earnings test show a non-trivially greater effect when exponential preferences are used.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:16503
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    References listed on IDEAS

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    1. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
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    3. Alan L. Gustman & Thomas L. Steinmeier, 2008. "Projecting behavioral responses to the next generation of retirement policies," Research in Labor Economics,in: Work, Earnings and Other Aspects of the Employment Relation, volume 28, pages 141-195 Emerald Publishing Ltd.
    4. Hanming Fang & Yang Wang, 2015. "Estimating Dynamic Discrete Choice Models With Hyperbolic Discounting, With An Application To Mammography Decisions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 565-596, May.
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    6. Hanming Fang & Dan Silverman, 2009. "Time-Inconsistency And Welfare Program Participation: Evidence From The Nlsy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1043-1077, November.
    7. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
    8. 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.
    9. Gustman, Alan L. & Steinmeier, Thomas L., 2012. "Policy effects in hyperbolic vs. exponential models of consumption and retirement," Journal of Public Economics, Elsevier, vol. 96(5), pages 465-473.
    10. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 607-643, August.
    11. 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.
    12. 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.
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    14. 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.
    15. Alan L. Gustman & Thomas L. Steinmeier, 2002. "Retirement and the Stock Market Bubble," NBER Working Papers 9404, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Gustman, Alan L. & Steinmeier, Thomas L., 2015. "Effects of social security policies on benefit claiming, retirement and saving," Journal of Public Economics, Elsevier, vol. 129(C), pages 51-62.
    2. Tolan, Songül & Kemptner, Daniel, 2016. "The Role of Time Preferences in Educational Decision Making," Annual Conference 2016 (Augsburg): Demographic Change 145756, Verein für Socialpolitik / German Economic Association.
    3. Lu, Yang & Zhuang, Xintian, 2014. "The impact of gender and working experience on intertemporal choices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 409(C), pages 146-153.
    4. Gustman, Alan L. & Steinmeier, Thomas L., 2012. "Policy effects in hyperbolic vs. exponential models of consumption and retirement," Journal of Public Economics, Elsevier, vol. 96(5), pages 465-473.
    5. Marc K. Chan, 2017. "Welfare Dependence and Self-Control: An Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1379-1423.
    6. Haan, Peter & Haywood, Luke & Schneider, Ulrich, 2016. "Labor Supply of Mothers: The Role of Time Discounting," Annual Conference 2016 (Augsburg): Demographic Change 145751, Verein für Socialpolitik / German Economic Association.
    7. Börsch-Supan, A. & Härtl, K. & Leite, D.N., 2016. "Social Security and Public Insurance," Handbook of the Economics of Population Aging, Elsevier.
    8. Frank van Erp & Niels Vermeer & Daniël van Vuuren, 2013. "Non-financial determinants of retirement," CPB Discussion Paper 243, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Daniel Kemptner & Songül Tolan, 2016. "The Role of Time Preferences in Educational Decision Making," Discussion Papers of DIW Berlin 1628, DIW Berlin, German Institute for Economic Research.

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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