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What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data

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Listed:
  • Hugo Benítez-Silva

    (SUNY – Stony Brook)

  • Debra S. Dwyer

    (SUNY – Stony Brook)

Abstract

This paper tests the Rational Expectations (RE) hypothesis regarding retirement expectations, controlling for sample selection, reporting biases, and unobserved heterogeneity. We find that retirement expectations in the Health and Retirement Study (HRS) are consistent with the RE hypothesis. We also examine how a wide array of factors, such as wealth, income, health insurance, pensions, and health status influence retirement expectations formation using panel data from all available waves of the HRS. We further analyze how new information affects the evolution of retirement expectations and discover that, on average, individuals correctly anticipate most uncertain events when planning their retirement, except for some health conditions and economic factors. Our results have important implications for a wide variety of models in economics that assume rational behavior.

Suggested Citation

  • Hugo Benítez-Silva & Debra S. Dwyer, 2003. "What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data," Working Papers wp037, University of Michigan, Michigan Retirement Research Center.
    • Handle: RePEc:mrr:papers:wp037
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    References listed on IDEAS

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    Cited by:

    1. Katherine G. Abraham & Susan N. Houseman, 2005. "Work and Retirement Plans among Older Americans," Book chapters authored by Upjohn Institute researchers, in: Robert L. Clark & Olivia S. Mitchell (ed.),Reinventing the Retirement Paradigm, pages 70-91, W.E. Upjohn Institute for Employment Research.
    2. Ricky Kanabar, 2012. "Unretirement in England: An empirical perspective," Discussion Papers 12/31, Department of Economics, University of York.
    3. Hugo Benítez-Silva & Debra Dwyer & Wayne-Roy Gayle & Thomas Muench, 2008. "Expectations in micro data: rationality revisited," Empirical Economics, Springer, vol. 34(2), pages 381-416, March.
    4. Steven J. Haider & Melvin Stephens, 2007. "Is There a Retirement-Consumption Puzzle? Evidence Using Subjective Retirement Expectations," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 247-264, May.
    5. Benitez-Silva, Hugo & Dwyer, Debra S., 2006. "Expectation formation of older married couples and the rational expectations hypothesis," Labour Economics, Elsevier, vol. 13(2), pages 191-218, April.
    6. Hugo Benítez-Silva, 2003. "Labor Supply Flexibility and Portfolio Choice: An Empirical Analysis," Working Papers wp056, University of Michigan, Michigan Retirement Research Center.

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