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The Retirement Consumption Puzzle: Evidence from a Regression Discontinuity Approach

  • Agar Brugiavini

    ()

    (Department of Economics, University Of Venice Cà Foscari)

  • Erich Battistin,

    (University of Padova)

  • Enrico Rettore

    (University of Padova)

  • Guglielmo Weber

    (University of Padova)

In this paper we investigate the size of the consumption drop at retirement in Italy. We use micro data on food and total non-durable household spending covering the period 1993-2004, and evaluate the change in consumption that accompanies retirement by exploiting the exogenous variability in pension eligibility to correct for the endogenous nature of the retirement decision. We take a regression discontinuity design approach, and make the identifying assumption that consumption would be the same around the threshold for pension eligibility if individuals would not retire. We check in our data that a non-negligible fraction of individuals retire as soon as they become eligible, and estimate at 9.8% the part of the non-durable consumption drop that is associated with retirement induced by eligibility. We show that such fall is not driven by liquidity problems for the less well off in the population, and can be accounted for by drops in goods that are work-related expenses or leisure substitutes. However, we also show that retirement induces a significant drop in the number of grown children living with their parents, and this can account for most of the retirement consumption drop.

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File Function: First version, 2007
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Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2007_27.

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Length: 32
Date of creation: 2007
Date of revision:
Handle: RePEc:ven:wpaper:2007_27
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