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A Neoclassical Growth Model with Endogenous Retirement

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Author Info
Kiminori Matsuyama (Department of Economics, Northwestern University and CIRJE, Faculty of Economics, University of Tokyo)

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Abstract

This paper extends Diamond (1965)'s one-sector neoclassical growth model with two-period lived, overlapping generations, by allowing the agents to make the labor force participation decision in their second period, in the spirit of Feldstein (1974). If the agents earn a high wage income when young, they choose to retire when old. This reduces the labor supply (through a lower participation rate of the elderly) and stimulates capital accumulation (through saving for retirement). The resulting high capital-labor ratio leads to a higher wage income for the next generation. If the agents earn a low wage income when young, they continue to work when old and save little, which implies a low capital-labor ratio and a low wage income for the next generation. Due to such positive feedback mechanisms, the endogeneity of retirement magnifies the persistence of growth dynamics, thereby slowing down a convergence to the steady state, and even generating multiple steady states for empirically plausible parameter values.

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Publisher Info
Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-174.

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Length: 28 pages
Date of creation: Sep 2002
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Handle: RePEc:tky:fseres:2002cf174

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  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  2. Basu, Kaushik & Van, Pham Hoang, 1998. "The Economics of Child Labor," American Economic Review, American Economic Association, vol. 88(3), pages 412-27, June.
  3. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October. [Downloadable!] (restricted)
  4. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March. [Downloadable!]
  5. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct. [Downloadable!] (restricted)
  7. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-51, April. [Downloadable!] (restricted)
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  8. Peter Diamond & Jonathan Gruber, 1997. "Social Security and Retirement in the U.S," NBER Working Papers 6097, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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