Keywords: Wealth effect, retirement
Abstract: It is well accepted that households increase consumption of goods and services in
response to an unexpected increase in wealth. Consensus estimates of this wealth
effect are in the range of 3 to 5 cents of additional consumption spending in the
long run for each additional dollar of wealth. Economic theory also suggests that
consumption of leisure, like consumption of goods and services, should increase with
positive shocks to wealth. In this paper, we ask whether the run-up in equity prices
during the 1990s led older workers to retire earlier than they had previously planned.
We identify the effect by exploiting unique data on retirement expectations from the
Health and Retirement Survey. Our econometric results suggest that respondents
who held corporate equity immediately prior to the bull market of the 1990s retired,
on average, 7 months earlier than other respondents.
Full paper (226 KB PDF)
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Last update: June 4, 2003