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A Neoclassical Growth Model with Endogenous Retirement

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  • Kiminori Matsuyama

    (Department of Economics, Northwestern University and CIRJE, Faculty of Economics, University of Tokyo)

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.

Suggested Citation

  • Kiminori Matsuyama, 2002. "A Neoclassical Growth Model with Endogenous Retirement," CIRJE F-Series CIRJE-F-174, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2002cf174
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    References listed on IDEAS

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