A dynamic structural analysis of health and retirement

Dissertation is devoted to establishing a structural dynamic model of retirement behaviour of older workers in Norway with complete characterization of their choice sets and beliefs – explicitly dependent on health status, labour market state occupied in the previous period, outcome of job search process, household characteristics and two income indices. The first paper develops theoretical structure of the model and proceeds with estimation. In addition it studies substitution effect between early retirement and disability pension as two main exit routes from Norwegian labour market. The second paper contains a summary of the measures of quality of structural dynamic models and proposes two new approaches. One builds on McFadden’s rho while another is based on the exogenous policy change during the modelled period. The third paper is devoted to ongoing pension reform in Norway. Both labour market consequences, welfare and inequality implications are simulated on the bases of the developed structural model. My findings indicate that reform succeeds in providing older workers with incentives to postpone their retirements while increasing both social welfare and income inequality

The dynamics of Bertrand price competition with cost-reducing investments

We extend the classic Bertrand duopoly model of price competition to a dynamic setting where competing duopolists invest in a stochastically improving production technology to “leapfrog” their rival and attain temporary low‐cost leadership. We find a huge multiplicity of Markov‐perfect equilibria (MPE) and show that when firms move simultaneously the set of all MPE payoffs is a triangle that includes monopoly payoffs and a symmetric zero mixed strategy payoff. When firms move asynchronously, the set of MPE payoffs is strictly within this triangle, but there still is a vast multiplicity of MPE, most of which involve leapfrogging.The authors would like to acknowledge the funding received from the Danish Council for Independent Research and Innovation Fund Denmark. Fedor Iskhakov gratefully acknowledges the support from the Australian Research Council projects CE110001029 and FL110100247 as well as from Frisch Centre project 1307 financed by the Ministry of Labor, Norwa

Learning and Confirmation Bias: Measuring the Impact of First Impressions and Ambiguous Signals

We quantify the widespread and significant economic impact of first impressions and confirmation bias in the financial advice market. We use a theoretical learning model and new experimental data to measure how these biases can evolve over time and change clients’ willingness to pay advisers. Our model demonstrates that clients’ confirmation bias will reinforce the effect of first impressions. Our results also lend support, in a new financial context, to theoretical models of learning under limited memory where people use unclear signals to confirm and reinforce their current beliefs. We find that almost two thirds of the participants in our experiment make choices that are consistent with a limited memory updating process: they interpret unclear advice to be good advice when it comes from the adviser they prefer. Our results show that models that account for behavioral factorssuch as confirmation bias may be needed to explain some financial decisions

Quasi-dynamic forward-looking model for joint household retirement decision under AFP scheme

Retirement behaviour is the theme of increasing interest in the recent labour economic studies due to its growing importance. In most countries which adopted pay-as-you-go public pension system the relative number of pensioners is increasing together with the level of life. This puts additional fiscal weight on the taxpayers who are financing current pensions. In order to compensate this demographic dynamics the governments have to take certain steps to improve labour force participation and stimulate additional supplementary pensions. To test possible policies in this field different models can be estimated to describe people s behaviour on the labour market. Current study presents several structural forward-looking quasi-dynamic models of households to serve the purpose of policy simulations. The models are set up in the random utility framework used by Thurstone (1927), McFadden (1973), Ben-Akiva, Lerman (1985) and spread widely in the discrete choice analysis. This approach suggests that the rational decision maker maximizes over the set of choices an utility function with determined and stochastic components. Stochastic part of the utility takes care of unobserved by the researcher factors and is assumed to be perfectly known to the agent. The determined part depends on the characteristics of either the agent or the alternatives, or both, and allows any specifications. Several utility specifications make up several models to be estimated and compared. Since the utility is specified as dependent on the fundamental attributes of the available options such as disposable income and leisure, the model appears structural other than reduced form. Structural models yield much better, more accurate results in simulations since they reflect all direct and indirect effects the policy may have on the taken choices. In the current study two revisions of the standard multinomial logit model are developed. It is taken into account that not only the current period utility is considered by the choice maker, but also the discounted sum of future periods utility. In other words, the agent plans the utility flow for several years ahead. Correspondingly, the two models reflect two and tree period setups in the first one the agent is allowed to consider the next period consequences of the current choice, and in the second one the planning horizon rises to two periods. The future periods considerations incorporated into the models make them forward-looking. These forward-looking issues are quite substantial when studying the retirement behaviour due to the fundamental property of being retired once a person has retired it is hardly possible to start working again. In the models we assume the retirement state to be strictly absorbing. Thus, once people choose retirement, they can not go back to any other state. Keeping this in mind, they will correct their retirement decisions compared to simple one period logic. The models are quasi-dynamic due to the fact that even though the time scale is present, only one static choice is modelled. Namely, at the eligibility point new option (to retire) becomes available to an individual and the choice is made whether to retire or to stay in the labour force. Finally, the sample is organized by households to take care of probable coordination between husband and wives as to retire simultaneously. Even if wife for example does not have retirement option available for her, she may change her labour force participation at the point when husband retires to take advantage of common leisure time. Thus, we assume some coordination within the household with respect to behaviour on the labour market and concentrate on studying coordinated choices of spouses. Once the models are estimated and the best one chosen, some simple simulation is performed. We try altering taxation by rising the total amount of tax paid by households by 10%. These policy results in the change of distribution of households among states. The thesis is organized as follows. Chapter 1 briefly describes the pension system in Norway and gives overview of the occurring rules. More detailed description with the mathematical formulas can be found in Appendix A. Chapter 2 is devoted to developing and presenting the models, but also a lot of attention is paid to describing the possible choice sets. One of the objectives of the current study was to keep the sample as vast as possible and not to exclude households with unusual wife s state. This resulted is several case divisions which are also discussed in chapter 2. Chapter 3 contains the sample data description used for estimating the models and concludes model specifications by introducing the deterministic part of the utility function. In chapter 4 the sequence of estimated models is followed, the models are compared and the best one is picked for simulations. Finally, chapter 5 presents the results of the simulation procedures. Appendix A contains accurate definitions of the procedures used for data construction while Appendix B has a set of table and graphs to visualize the sample

Pension Reforms in Norway: Evidence from a Structural Dynamic Model

This paper simulates a set of proposed policies from the Norwegian pension reform within a structural dynamic model of health and retirement estimated on the Norwegian labour market data. The paper focuses on the two main elements of the reform, namely the new pension entitlement accrual rules linking benefits more closely to earnings and the new pension benefit drawing rules designed to eliminate the incentives distortions with respect to the time of retirement. The effects of these proposals are investigated in terms of labour market outcomes, social welfare and income distribution. It is shown that while the proposed pension reform succeeds in urging the older workers to postpone their retirement and induces an increase in total social welfare, individuals in good health who retire early experience a negative change in their discounted utility. In addition, an increase in social welfare is accompanied with an increase in income inequality.Pension reform; incentive neutral retirement; pension entitlement accrual rules; labour market outcomes; social welfare; income inequality; structural dynamic model; health; retirement

Dynamic Programming Model of Health and Retirement

A structural dynamic programming model is applied for modeling labour market transitions among older age workers in Norway in 1992-2003. Special attention is given to early retirement pensiion and disability pension as two major exit routes from the labour force. Health status is represented by a latent variable reflecting the eligibility for participating in disability programs. Incomplete information maximum likelihood method is used in several stages to facilitate the estimation. The model is used to investigate the degree of potential substitution of the early retirement and retirement through the disability insurance scheme. Estimates of the structural parameters of the concealed health process allow for forecasting the individual "eligibility" for the disability and thus facilitate the assessment of the potential substitution between the two exit routes from the labour force. Performed policy simulation of the complete elimination of the early retirement program indicates nearly complete return of th otherwise early pensioners back to the labour market.Retirement; health; early retirement; disability; labour market transitions; structural dynamic model; dynamic programming