Retirement Choices in Italy: What an Option Value Model Tells Us

Abstract:     
Using Italian data, we estimate an option value model to quantify the effect of financial incentives on retirement choices. As far as we know, this is the first empirical study to estimate the conditional multiple-years model put forward by Stock and Wise (1990). This implies that we account for dynamic self-selection bias. We also present an extended version of this model in which the marginal value of leisure is random. The models yield plausible estimates of the preference parameters. Dynamic self-selection results in a considerable downward bias in the estimate of the marginal utility of leisure. We perform a simulation study to gauge the effects of a dramatic pension reform. Underestimation of the value of leisure translates into sizeable over-prediction of the impact of reform. For the female sample, the model is able to predict almost perfectly the age-specific hazard rates. For the male sample, we obtain a good fit. Results for males should, however, be interpreted with caution since we are not able to fully correct for dynamic self-selection bias.

Number of Pages in PDF File: 35

Keywords: Retirement, Option Value Model, Dynamic Self-Selection, Unobserved Preference Heterogeneity

JEL Classification: J26, H55, C33, C34, C35

working papers series