Bounded Rationality and Optimal Retirement Age
By Hyeon Park
This paper explores a lifecycle model of labor supply and endogenous retirement behavior for households whose planning window is truncated and who will reoptimize as extra information on productivity is revealed over time. This short horizon model internalizes the restriction on rationality for temporal resource allocation and the labor supply is closely dependent on the degree of productivity changes in view. With the model, the endogenous retirement timing—the moment at which the marginal utility from the intended expenditure drops below a threshold—also evolves along the planning window. Using a discrete time overlapping generations framework with leisure substitutability, in which the constraint on time is explicitly added, I demonstrate that the calibrated model economy reasonably replicates the salient facts regarding lifecycle labor supply and retirement behaviors without a borrowing constraint commonly found in models of leisure-consumption substitutability. With the extended environment of Social Security and mortality risks, this paper explicitly quantifies the relationship among retirement age, IES, planning horizon, social security benefits and other lifecycle characteristics from the calibrated general equilibrium, and furthermore this result is robust to tax experiments and sensitivity check.
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