Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model / Zvi Bodie, Robert C. Merton, William F. Samuelson.

Format:

Book

Author/Creator:

Bodie, Zvi.

Contributor:

National Bureau of Economic Research.

Merton, Robert C.

Samuelson, William F.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3954.

NBER working paper series no. w3954

Language:

English

Subjects (All):

Consumption (Economics)--Mathematical models.

Consumption (Economics).

Labor supply--Mathematical models.

Labor supply.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1992.

Cambridge, Massachusetts : National Bureau of Economic Research, 1992.

Summary:

This paper examines the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle. The model incorporates the fact that individuals may have considerable flexibility in varying their work effort (including their choice of when to retire). Given this flexibility, the individual simultaneously determines optimal levels of current consumption, labor effort, and an optimal financial investment strategy at each point in his life cycle. We show that labor and investment choices are intimately related. The ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante. The model explains why the young (enjoying greater labor flexibility over their working lives) may take greater investment risks than the old. It also offers an explanation as to why consumption spending is relatively "smooth" despite volatility in asset prices. Finally, the paper provides a compact method for valuing the risky cash flows associated with future wage income.

Notes:

Print version record

January 1992.