DOI QR코드

DOI QR Code

HOW TO PREPARE FOR RETIREMENT? OPTIMAL SAVING, LABOR SUPPLY, AND INVESTMENT STRATEGY

  • Koo, Bon Cheon (GRADUATE DEPARTMENT OF FINANCIAL ENGINEERING, AJOU UNIVERSITY) ;
  • Koo, Jisoo (COLLEGE OF BUSINESS ADMINISTRATION, AJOU UNIVERSITY) ;
  • Song, Hana (COLLEGE OF BUSINESS ADMINISTRATION, AJOU UNIVERSITY) ;
  • Yoon, Hyo-Bin (COLLEGE OF BUSINESS ADMINISTRATION, AJOU UNIVERSITY) ;
  • Kim, Min-Seok (COLLEGE OF BUSINESS ADMINISTRATION, AJOU UNIVERSITY)
  • Received : 2014.09.17
  • Accepted : 2014.10.02
  • Published : 2014.12.25

Abstract

In this paper we study consumption-labor supply decision of an agent who prepares for retirement at a known time in the future. The agent is assumed to have a preference which is represented by the von Neumann-Morgenstern utility function in which the felicity function has constant relative risk aversion over the composite of consumption and leisure. The composite is obtained by the Cobb-Douglas function. A general problem has been studied by Bodie et al. (2004). We contribute to the literature by deriving the Slutsky equations and conducting comparative statics. In particular, we show that wealth effect can exhibit an interesting property depending upon the time until retirement, as the interest rate increases.

Acknowledgement

Supported by : National Research Foundation of Korea

References

  1. Markowitz, H., Portfolio Selection, Journal of Finance, 8 (1952), 77-91.
  2. Merton, Robert C., Lifetime Portfolio Selection under Uncertainty: The Continuous Time Case, Review of Economics and Statistics, 51 (1969), 247-257. https://doi.org/10.2307/1926560
  3. Samuelson, Paul A., Lifetime Portfolio Selection by Dynamic Stochastic Programing, Review of Economics and Statistics, 51 (1969), 239-246. https://doi.org/10.2307/1926559
  4. De La Grandville, Olivier, In Quest of the Slutsky Diamond, The American Economic Review, Vol.79 (1989), No.3, 468-481.
  5. Bodie Z., Robert C. Merton, and Samuelson W. F., Labor Supply Flexibility and Portfolio Choice in a Life Cycle Model, Journal of Economic Dynamics and Cotrol, 16 (1992), 427-449. https://doi.org/10.1016/0165-1889(92)90044-F
  6. Karatzas I. and Steven E. Shreve, Methods of Mathematical Finance, Springer, 1998.
  7. Bodie, Z., Jerome B. Detemple, Susanne Otruba, and Stephan Walter, Optimal consumption-portfolio choices and retirement planning, Journal of Economic Dynamics and Cotrol, 28 (2004), 1115-1148. https://doi.org/10.1016/S0165-1889(03)00068-X
  8. Choi J. K., Shim G., Shin Y. H., Optimal Portfolio, Consumption-Leisure and Retirement Choice Problem with CES Utiltiy, Mathematical Finance, 18 (2008), No. 3, 445-472. https://doi.org/10.1111/j.1467-9965.2008.00341.x