The Life Cycle Effects of Subjective Mortality Risk

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.

Keywords: consumption, labor supply, Euler Equation, subjective survival probability, intertemporal substitution

JEL Classifications: J11, J14, J22, J26

Working Paper Series