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Abstract: This paper provides an empirical analysis of how the U.S. Social Security and Medicare insurance system affect the labor supply of older males in the presence of incomplete markets for loans, annuities, and health insurance. We estimate a detailed dynamic programming (DP) model of the joint labor supply and Social Security acceptance decision, focusing on a sample of males in the low to middle income brackets whose only pension is Social Security. The DP model delivers a rich set of predictions about the dynamics of retirement behavior, and comparisons of actual vs. predicted behavior show that the DP model is able to account for wide variety of phenomena observed in the data, including the pronounced peaks in the distribution of retirement ages at 62 and 65 (the ages of early and normal eligibility for Social Security benefits, respectively). We identify a significant fraction of “health insurance constrained” individuals who have no form of retiree health insurance other than Medicare, and who can only obtain fairly priced private health insurance via their employer’s group health plan. The combination of significant individual risk aversion and a long tailed (Pareto) distribution of health care expenditures implies that there is a significant “security value” for these individuals to remain employed until they are eligible for Medicare coverage at age 65. Overall, our model suggests that a number of heretofore puzzling aspects of retirement behavior can be viewed as artifacts of particular details of the Social Security rules, whose incentive effects are especially strong for lower income individuals and those who do not have access to fairly priced loans, annuities, and health insurance. 1

Households in the west African semi-arid tropics, as in much of the developing world, face substantial risk-- an inevitable consequence of engaging in rainfed agriculture in a drought-prone environment. It has long been hypothesized that these households keep livestock as a buffer stock to insulate their consumption from fluctuations in income. This paper has the simple goal of testing that hypothesis. Our results indicate that livestock transactions play less of a consumption smoothing role than is often assumed. Livestock sales compensate for at most thirty percent, and probably closer to twenty percent of income shortfalls due to village-level shocks alone. We discuss possible explanations for these results and suggest directions for future work.

In this article, I suggest that incomplete markets and transaction costs are crucial for explaining the high equity premium and the low risk-free rate. I first demonstrate the failure of the complete frictionless markets model in explaining these return puzzles and then show how introducing incomplete markets and transaction costs can lead to success. Additionally, I explain how these features lead to predictions concerning individual consumptions, wealths, portfolios, and asset market transactions that are in better agreement with the facts than the predictions of the complete frictionless markets model.

This paper uses Þeld evidence and a structural consumption-savings model to estimate discount functions. Evidence on wealth accumulation implies that people act patiently when considering long-term decisions, while data on credit card borrowing and consumption-income comovement suggests impatient behavior in the short term. Using the Method of Simulated Moments we estimate an institutionally rich model that features stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and quasi-hyperbolic discount functions. We Þnd benchmark estimates of 40 % for the shortterm discount rate and 4.3 % for the long-term discount rate. Most speciÞcations reject the null hypothesis of time-consistent exponential discounting. Exact quantitative results depend on assumptions about the return on illiquid assets and the coefficient of relative risk aversion.

This article reviews the current state of knowledge on the determinants of saving rates, presenting the main findings and contributions of the recently completed World Bank research project, "Saving Across the World." The article discusses the basic design of the research project and its core database, the World Saving Database. It then summarizes the main project results and places them in the context of the literature on saving, identifying the key policy and nonpolicy determinants of private saving rates. Special attention is paid to the relationship between growth and saving and the impact of specific policies on saving rates. The article concludes by introducing the studies included in this special issue

Abstract—Not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non– business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10 % of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non–business owners for reasons unrelated to precautionary motives. I.

All remaining errors are our own.

We study the welfare cost of market incompleteness in a generalized Bewley model where idiosyncratic risk takes the form of entrepreneurial productivity shocks. Market incompleteness in our framework has two dimensions. First, in the Bewley tradition, only a limited set of instruments for consumption smoothing is available. Second, entrepreneurs’ capital rental is subject to collateral constraints. As is well-known, it is harder to self-insure against more persistent shocks, and the welfare cost of missing consumption insurance increases with shock persistence. On the other hand, with collateral constraints, an increase in shock persistence leads to better allocation of production factors through entrepreneurs ’ self-financing, and the welfare cost of imperfect capital rental markets decreases with shock persistence. The overall welfare cost of market incompleteness can be increasing, decreasing, or even non-monotone in shock persistence, depending on the relative strengths of its two components—the cost of missing insurance and the cost of imperfect capital markets.

It is well-known that within-cohort consumption inequality increases with age in developed countries and this pattern is consistent with the permanent income hypothesis, under which households smooth consumption through credit markets in the short-run against transient shocks and in the medium-run over the life cycle. This paper provides evidence regarding the age effects in within-cohort inequality for several low-income developing countries, where credit markets are underdeveloped. Empirical results show patterns unnoticed in the literature. The within-cohort inequality in consumption often decreases with age, and the divergence from the pattern from those observed in developed countries is larger among uneducated and rural households. We provide an interpretation that the decreasing age effect in consumption inequality within cohort, found widely in low-income regions and classes in Asia, is consistent with the autarky model with decreasing within-cohort inequality in income in agricullture-based rural societies. 1