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Policy effects in hyperbolic vs. exponential models of consumption and retirement

Author: Alan L Gustman; Thomas L Steinmeier; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2010.
Series: Working paper series (National Bureau of Economic Research), no. 16503.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Additional Physical Format: Print version:
Gustman, Alan L.
Policy effects in hyperbolic vs. exponential models of consumption and retirement.
Cambridge, Mass. : National Bureau of Economic Research, ©2010
(DLC) 2011655748
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Alan L Gustman; Thomas L Steinmeier; National Bureau of Economic Research.
OCLC Number: 676690022
Description: 1 online resource (43 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 16503.
Responsibility: 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.

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