Labor Supply Flexibility and Portfolio Choice
Boston University - Department of Finance & Economics
William F. Samuelson
Boston University - Department of Finance & Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w3043
This paper develops a model showing that people who have flexibility in choosing how much to work will prefer to invest substantially more of their money in risky assets than if they had no such flexibility. Viewed in this way, labor supply flexibility offers insurance against adverse investment outcomes. The model provides support for the conventional wisdom that the young can tolerate more risk in their investment portfolios than the old. The model has other implications for the study of household financial behavior over the life cycle. It implies that households will take account of the value of labor supply flexibility in deciding how much to invest in their own human capital and when to retire. At the macro level it implies that people will have a labor supply response to shocks in the financial markets.
Number of Pages in PDF File: 31
Date posted: June 9, 2004