Three Models of Retirement: Computational Complexity Versus Predictive Validity
Empirical analysis often raises questions of approximation to underlying individual behavior. Closer approximation may require more complex statistical specifications, On the other hand, more complex specifications may presume computational facility that is beyond the grasp of most real people and therefore less consistent with the actual rules that govern their behavior, even though economic theory may push analysts to increasingly more complex specifications. Thus the issue is not only whether more complex models are worth the effort, but also whether they are better. We compare the in-sample and out-of-sample predictive performance of three models of retirement -- "option value," dynamic programming, and probit -- to determine which of the retirement rules most closely matches retirement behavior in a large firm. The primary measure of predictive validity is the correspondence between the model predictions and actual retirement under the firm's temporary early retirement window plan. The "option value" and dynamic programming models are considerably more successful than the less complex probit model in approximating the rules individuals use to make retirement decisions, but the more complex dynamic programming rule approximates behavior no better than the simpler option value rule.
|Date of creation:||Dec 1990|
|Date of revision:|
|Publication status:||published as David A. Wise, editor. Topics in the Economics of Aging. Chicago: The University of Chicago Press, pp. 21-60, April 1992.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan L. Gustman & Thomas L. Steinmeier, 1983.
"A Structural Retirement Model,"
NBER Working Papers
1237, National Bureau of Economic Research, Inc.
- Burtless, Gary, 1986. "Social Security, Unanticipated Benefit Increases, and the Timing of Retirement," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 781-805, October.
- Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, December.
- Laurence J. Kotlikoff & David A. Wise, 1987.
"The Incentive Effects of Private Pension Plans,"
in: Issues in Pension Economics, pages 283-340
National Bureau of Economic Research, Inc.
- Berkovec, James & Stern, Steven, 1991. "Job Exit Behavior of Older Men," Econometrica, Econometric Society, vol. 59(1), pages 189-210, January.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3558. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.