Social Security Incentives and Human Capital Investment

While the effect of social security systems on retirement decisions has received much attention, the impact of these systems on individuals’ incentives to invest in their human capital has not been analyzed. We integrate human capital investment and retirement decisions in a simple analytical life-cycle model with full certainty and investigate how different social security schemes may a¤ect welfare, human capital investment and labor supply. We analyze and compare three different social security systems. Our results suggest that actuarial adjustment and the link between individual social security contributions and benefits increase human capital investment and postpone retirement.Social security, retirement, education, human capital, labor supply

The Dynamic Cost of the Draft

We propose a dynamic general equilibrium model with human capital accumulation to evaluate the economic consequences of compulsory services (such as military draft or social services). Our analysis identifies a so far ignored dynamic cost arising from distortions in time allocation over the life-cycle. We provide conservative estimates for the excess burden that arises when the government relies on forced labor rather than on income taxation to finance public expenditures. Our results suggest that eliminating the draft could produce considerable dynamic gains, both in terms of GDP and lifetime utility.conscription, draft, time allocation, distortionary taxation, computable general equilibrium models.

Dynamic Consistency in Denmark: A Longitudinal Field Experiment

Evidence that individuals have dynamically consistent preferences is usually generated by studying the discount rates of the individual over different horizons, but where those rates are elicited at a single point in time. If these elicited discount rates vary by horizon the individual is typically claimed to have preferences that imply a dynamic inconsistency, although this inference requires additional assumptions such as intertemporal separability. However, what one really wants to know is if the same subject has the same discount rate function when that individual is asked at a later point in time. Such panel tests then require than one allow for possible changes in the states of nature that the subject faces, since they may confound any in-sample comparisons of discount rate functions at different points in time. We report the results of a large-scale panel experiment undertaken in the field that allows us to examine this issue. In June 2003 we elicited subjective discount rates from 253 subjects, representative of the adult Danish population. Between September 2003 and November 2004 we re-visited 97 of these subjects and repeated these tasks. In each visit we also elicited information on their individual characteristics, as well as their expectations about the state of their own economic situation and macroeconomic variables. We find evidence in favor of dynamic consistency.

Risk Attitudes, Randomization to Treatment, and Self-Selection Into Experiments

Randomization to treatment is fundamental to statistical control in the design of experiments. But randomization implies some uncertainty about treatment condition, and individuals differ in their preferences towards taking on risk. Since human subjects often volunteer for experiments, or are allowed to drop out of the experiment at any time if they want to, it is possible that the sample observed in an experiment might be biased because of the risk of randomization. On the other hand, the widespread use of a guaranteed show-up fee that is non-stochastic may generate sample selection biases of the opposite direction, encouraging more risk averse samples into experiments. We undertake a field experiment to directly test these hypotheses that risk attitudes play a role in sample selection. We follow standard procedures in the social sciences to recruit subjects to an experiment in which we measure their attitudes to risk. We exploit the fact that we know certain characteristics of the population sampled, adults in Denmark, allowing a statistical correction for sample selection bias using standard methods. We also utilize the fact that we have a complex sampling design to provide better estimates of the target population. Our results suggest that randomization bias is not a major empirical problem for field experiments of the kind we conducted if the objective is to identify marginal effects of sample characteristics. However, there is evidence that the use of show-up fees may have generated a sample that was more risk averse than would otherwise have been observed.

Estimating Risk Attitudes in Denmark

We estimate individual risk attitudes using controlled experiments in the field in Denmark. These risk preferences are elicited by means of field experiments involving real monetary rewards. The experiments were carried out across Denmark using a representative sample of 253 people between 19 and 75 years of age. Risk attitudes are estimated for various individuals differentiated by socio-demographic characteristics such as income and age. Our results indicate that the average Dane is risk averse, and that risk neutrality is an inappropriate assumption to apply. We also find that risk attitudes do vary significantly with respect to several important socio-demographic variables. These conclusions are robust to the use of relatively flexible specifications of risk preferences. When individual characteristics of the sample are ignored, relative risk aversion appears not to be constant over the domain of income considered here, and rises rapidly as income increases above "small" amounts. However, relative risk aversion appears to be constant when one corrects for individual heterogeneity, although there is considerable uncertainty in the characterization of risk attitudes for low stakesRisk preferences, field experiments, heterogeneity

Eliciting Risk and Time Preferences Using Field Experiments: Some Methodological Issues

We design experiments to jointly elicit risk and time preferences for the adult Danish population. The experimental procedures build on laboratory experiments that have been evaluated using traditional subject pools. The field experiments utilize field sampling designs that we developed, and procedures that were chosen to be relatively transparent in the field with non-standard subject pools. Our overall design was also intended to be a general template for such field experiments in other countries. We examine the characterization of risk over a wider domain for each subject than previous experiments, allowing more precise estimates of risk attitudes. We also examine individual discount rates over six time horizons, as the first stage in a panel experiment in which we revisit subjects to test consistency and stability of responses over time. Risk and time preferences are heterogeneous, varying by observable individual characteristics. On a methodological level, we implement a refinement of existing procedures which elicits much more precise estimates, and also mitigates framing effects.

Willingness to Pay for Insurance in Denmark

We estimate the maximum amount that Danish households are willing to pay for three different types of insurance: auto, home and house insurance. We use a unique combination of claims data from the largest private insurance company in Denmark, measures of individual risk attitudes and discount rates from a field experiment with a representative sample of the adult Danish population, and information on household income and wealth from registers at Statistics Denmark. We assume that households maximize expected inter-temporal utility subject to an inter-temporal budget constraint with several possible states of nature, where all uncertainty is realized in the initial period and any loss incurred by an accident is subtracted from initial wealth. The estimated willingness to pay is based on annual claims and should thus be considered as an annual premium. Since there is some uncertainty about the estimates of risk attitudes and discount rates, there is some uncertainty about the estimated willingness to pay. We use a randomized factorial design in our sensitivity analysis where each simulation involves a random draw from independent normal distributions of the estimated risk and time preferences. The results show that the willingness to pay is marginally higher than the actuarial fair value under Expected Utility Theory. However, the estimated willingness to pay is significantly higher under Rank-Dependent Utility Theory, and for some households it may be up to 600% higher than the actuarial value of the insurance claims

Risk Attitudes, Sample Selection and Attrition in a Longitudinal Field Experiment

Longitudinal experiments allow one to evaluate the temporal stability of latent preferences, but raise concerns about sample selection and attrition that may confound inferences about temporal stability. We evaluate the hypothesis of temporal stability in risk preferences using a remarkable data set that combines socio-demographic information from the Danish Civil Registry with information on risk attitudes from a longitudinal field experiment. Our experimental design builds in explicit randomization on the incentives for participation. The results show that the use of different participation incentives can affect sample response rates and help identify the effects of selection. Correcting for endogenous sample selection and panel attrition changes inferences about risk preferences in an economically and statistically significant manner. Estimates of risk preferences change with these corrections. In general we find evidence consistent with temporal stability of risk preferences when one corrects for selection and attrition