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Abstract:
This paper analyzes the impact of subjective mortality risk on consumption and labor choice in a life cycle model. Using panel data from the Health and Retirement Survey (HRS), I estimate utility parameters, specifically the intertemporal elasticity of substitution (IES) and the Frisch marginal utility held constant labor elasticity. I construct implied subjective probabilities generated from a Weibull distribution of survival from survey responses pertaining to chances of survival to fixed ages. Also, I consider both additively separable and non-separable within period utility functions in estimating log-linear versions of the Euler equations for consumption, labor and leisure respectively. After instrumenting for measurement error and endogeneity in subjective survival probabilities using variables for parental longevity, I find that increases in consumption growth are associated increases in subjective survival probability with estimates of the IES between 0.3 and 1.2. I also find the Frisch labor elasticity is around 0.8 when estimating the Euler equation for labor. Under non-separable utility, I find no evidence of intertemporal substitution in response to changes in subjective mortality. However, evidence of the response of labor to expected wage growth remains.
consumption, labor supply, Euler Equation, subjective survival probability, intertemporal substitution
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