Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model
This paper examines the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle. The model incorporates the fact that individuals may have considerable flexibility in varying their work effort (including their choice of when to retire). Given this flexibility, the individual simultaneously determines optimal levels of current consumption, labor effort, and an optimal financial investment strategy at each point in his life cycle. We show that labor and investment choices are intimately related. The ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante. The model explains why the young (enjoying greater labor flexibility over their working lives) may take greater investment risks than the old. It also offers an explanation as to why consumption spending is relatively "smooth" despite volatility in asset prices. Finally, the paper provides a compact method for valuing the risky cash flows associated with future wage income.
|Date of creation:||Jan 1992|
|Publication status:||published as Journal of Economic Dynamics and Control, Vol. 16 (July/October 1992).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
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- Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters,in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
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- Svensson, L.E.O., 1988. "Portfolio Choice And Asset Pricing With Nontraded Assets," Papers 417, Stockholm - International Economic Studies.
- Lars E.O. Svensson, 1988. "Portfolio Choice and Asset Pricing With Nontraded Assets," NBER Working Papers 2774, National Bureau of Economic Research, Inc.
- 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 247-257, August.
- Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
- G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
- Williams, Joseph T, 1978. "Risk, Human Capital, and the Investor's Portfolio," The Journal of Business, University of Chicago Press, vol. 51(1), pages 65-89, January.
- Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-548, October.
- Svensson, Lars E. O., 1989. "Portfolio choice with non-expected utility in continuous time," Economics Letters, Elsevier, vol. 30(4), pages 313-317, October.
- Svensson, L.E.O., 1988. "Portfolio Choice With Non-Expected Utility In Continuous Time," Papers 423, Stockholm - International Economic Studies.
- Bergman, Yaacov Z., 1985. "Time preference and capital asset pricing models," Journal of Financial Economics, Elsevier, vol. 14(1), pages 145-159, March.
- Zvi Bodie & William Samuelson, 1989. "Labor Supply Flexibility and Portfolio Choice," NBER Working Papers 3043, National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)
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