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Interdependent durations in joint retirement

Authors: Bo E. Honoré and Áureo de Paula
Date: 06 March 2014
Type: cemmap Working Paper, CWP08/14
DOI: 10.1920/wp.cem.2014.0814

Abstract

This paper introduces a bivariate version of the generalized accelerated failure time model. It allows for simultaneity in the econometric sense that the two realized outcomes depend structurally on each other. The proposed model also has the feasure that it will generate equal durations with positive probability. The motivating example is retirement decisions by married couples. In that example it seems reasonable to allow for the possibility that the each partner's optimal retirement time depends on the retirement time of the spouse. Moreover, the data suggest that the wife and the husband retire at the same time for a non-negligible fraction of couples. Our approach takes as starting point a stylized economic model that leads to a univariate generalized accelerated failure time model. The covariates of that generalized accelerated failure time model act as utility-flow shifters in the economic model. We introduce simultaneity by allowing the utility flow in retirement to depend on the retirement status of the spouse. The econometric model is then completed by assuming that the observed outcome is the Nash bargaining solution in that simple economic model. The advantage of this approach is that it includes independent realizations from the generalized accelerated failure time model as a special case, and deviations from this special case can be given an economic interpretation. We illustrate the model by studying the joint retirement decisions in married couples using the Health and Retirement Study. We provide a discussion of relevant identifying variation and estimate our model using indirect inference. The main empirical fi nding is that the simultaneity seems economically important. In our preferred speci cation the indirect utility associated with being retired increases by approximately 5% if one's spouse is already retired and unobservables exhibit positive correlation. The estimated model also predicts that the indirect eff ect of a change in husbands' pension plan on wives' retirement dates is about 4% of the direct e ffect on the husbands.

Download full version
New version:
Bo E. Honoré and Áureo de Paula February 2016, A new model for interdependent durations with an application to joint retirement, cemmap Working Paper, CWP07/16, Institute for Fiscal Studies
Previous version:
Bo E. Honoré and Áureo de Paula March 2013, Interdependent durations in joint retirement, cemmap Working Paper, CWP05/13

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