Working Papers:  

Portfolio Allocation over Life-Cycle with Multiple Late-in-Life Saving Motives [PDF

Older households face health-related risks, including risk of being in need of long-term care and mortality risk.  How these risks affect financial portfolio choice of households depends on household preferences for long-term care and bequest. Using linked survey-administrative data on clients of a mutual fund company, this paper finds that the desire to have enough resources for long-term care and bequests are overall strong but also heterogeneous across households.  The estimated relationship between actual stock share of households and the strength of these preferences is qualitatively similar but quantitatively much weaker compared to the predictions from the life-cycle model with the estimated preference heterogeneity.  Based on the predictions from the model, this paper discusses what financial instruments would better meet the needs of households. 

Heterogeneity in Expectations, Risk Tolerance, and Household Stock Shares [PDF, Appendix] (with John Ameriks, Gabor Kezdi and Matthew D. Shapiro), Vanguard Research Initiative Working Paper and NBER Working Paper 25269. Accepted at JBES.  

This paper investigates the relationship between stock share and expectations and risk preferences.   The survey allows individual-level, quantitative estimates of risk tolerance and of the perceived mean and variance of stock returns. These estimates have economically and statistically significant association for the distribution of stock shares with relative magnitudes in proportion with the predictions of theories.  Incorporating survey measurement error in the estimation model increases the estimated associations twofold, but they are still substantially attenuated being only about 5 percent of what benchmark finance theories predict.  Because of the careful attention in the estimation to measurement error, the attenuation likely arises from economic behavior rather than errors in variables. 

The Wealth of Wealthholders [PDF] (with John Ameriks, Andrew Caplin, Matthew D. Shapiro and Christopher Tonetti), Vanguard Research Initiative Working Paper and NBER Working Paper 20972.

This paper introduces the Vanguard Research Initiative (VRI), a new panel survey of wealthholders designed to yield high-quality measurements of a large sample of older Americans who arrive at retirement with significant financial assets. The VRI links survey data with a variety of administrative data from Vanguard. The survey features an account-by-account approach to asset measurement and a real-time feedback and correction mechanism that are shown to be highly successful in eliciting accurate measures of wealth. Specifically, the VRI data reflect unbiased and precise estimates of wealth when compared to administrative account data. The VRI sample has characteristics similar to populations meeting analogous wealth and Internet access eligibility conditions in the Health and Retirement Study (HRS) and Survey of Consumer Finances (SCF). To illustrate the value of the VRI, the paper shows that the relationship between wealth and expected retirement date is very different in the VRI than in the HRS and SCF—mainly because those surveys have so few observations where wealth levels are high enough to finance substantial consumption during retirement.

The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation [PDF] (with Ruediger Bachmann, Jinhui Bai and Fudong Zhang), CEPR Working Paper DP12384

This paper explores the welfare and distributional effects of fiscal volatility using a neoclassical stochastic growth model with incomplete markets.  In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks.  We calibrate our model to key features of the U.S. economy, before eliminating government purchases shocks.  We then evaluate the distributional consequences of the elimination of fiscal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings.  

Older Americans Would Work Longer If Jobs Were Flexible [PDF] (with John Ameriks, Joseph Briggs, Andrew Caplin, Matthew D. Shapiro, and Christopher Tonetti), Vanguard Research Initiative Working Paper and NBER Working Paper 24008.  R&R at AEJ: Macro

Older Americans, even those who are long retired, have strong willingness to work, especially in jobs with flexible schedules. For many, labor force participation near or after normal retirement age is limited more by a lack of acceptable job opportunities or low expectations about finding them than by unwillingness to work longer. This paper establishes these findings using an approach to identification based on strategic survey questions (SSQs) purpose-designed to complement behavioral data.  These findings suggest that demand-side factors are important in explaining late-in-life labor market behavior and need to be considered in designing policies aimed at promoting working longer.

Forced Retirement Risk and Portfolio Choice [PDF] (with Guodong Chen and Tong-yob Nam)

The literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using the Health and Retirement Study data, this paper finds the forced retirement risk to be significant and also highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.

Research in Progress: 

The Welfare Cost of Self-Insurance against Late-Life Risks

Nursing Homes in General Equilibrium: Implications for Long-term Care Policies (with Tatyana Koreshkova)

Nearly a third of elderly Americans will have a long-term stay in a nursing home over their lives; half will enter as private payers.  The objective of this paper is to understand the effects of public policies on the nursing home entrance decision, associated long-term care costs, and individual welfare in general equilibrium.  The novelty of our approach is to analyze the demand for nursing homes in an environment with endogenous supply of nursing home services. On the supply side, nursing homes decide the quality of service, out-of-pocket price, supply and allocation of beds between privately-paid and Medicaid residents, subject to the industry regulations. On the demand side, individuals, heterogeneous in health, wealth and access to alternative care, make a nursing-home entry decision.  Selection into the nursing home, quality and quantity of beds and their private and social costs are jointly determined in equilibrium. The model generates nursing home use patterns across demographic groups that are consistent with the data. In the dynamic version of the model, we examine strategic behaviors arising on both sides of the market: while Medicaid induces individuals to time their consumption and nursing home entry, nursing homes influence the pool of residents via pricing and quality decisions. We show that interactions of the demand and supply sides of the nursing home market have important implications for the effects of long-term care policies.