Working Papers

Bei Lu, John Piggott, and Bingwen Zheng

This chapter discusses the potential expansion of the role of the notional defined contribution (NDC) paradigm in the ongoing reforms of retirement provision in China. China has remarkably high nominal retirement coverage of its population, but issues of sustainability, equity, and governance are challenging and real. Further, while many broad policy guidelines are set by the central government, jurisdictions at provincial, city, and sometimes even district level have major control over implementation, covering administration, benefit rates, and other important retirement policy features.

Elena Capatina, Michael Keane, Shiko Maruyama

This paper studies the effects of health on earnings dynamics and on consumption inequality over the life-cycle. We build and calibrate a life-cycle model with idiosyncratic health, earnings and survival risk where individuals make labor supply and asset accumulation decisions, adding two novel features. First, we model health as a complex multi-dimensional concept. We differentiate between functional health and underlying health risk, temporary vs. persistent health shocks, and predictable vs. unpredictable shocks. Second, we study the interactions between health and human capital accumulation (learning-by-doing). These features are important in allowing the model to capture the degree to which, and the pathways through which, health impacts earnings and consumption patterns. They are also very important in estimating the value of health insurance and social insurance. A key finding is that health shocks account for roughly half of the growth in offer wage inequality over the life cycle. Eliminating health shocks leads to a 5.5% decline in the variance of the present value of earnings across all individuals.

Keywords: Health, Income Risk, Precautionary Saving, Health Insurance, Welfare

Zvi Eckstein, Michael Keane and Osnat Lifshitz

Comparing the 1935 and 1975 U.S. birth cohorts, wages of married women grew twice as fast as for married men, and the wage gap between married and single women turned from negative to positive. The employment rate of married women also increased sharply, while that of other groups remained quite stable. To better understand these diverse patterns we develop a lifecycle model incorporating individual and household decisions about education, employment, marriage/divorce and fertility. The model provides an excellent fit to wage and employment patterns, along with changes in education, marriage/divorce rates, and fertility. We assume fixed preferences, but allow for four exogenously changing factors: (i) mother’s education, health and taxes/transfers; (ii) marriage market opportunities and divorce costs; (iii) the wage structure and job offers; (iv) contraception technology. We quantify how each factor contributed to changes across cohorts. We find that factor (iii) was the most important force driving the increase in relative wages of married women, but that all four factors are important for explaining the many socio-economic changes that occurred in the past 50 years. Finally, we use the model to simulate a shift from joint to individual taxation. In a revenue neutral simulation, we predict this would increase employment of married women by 9% and the marriage rate by 8.1%.

Julie Agnew, Hazel Bateman, Christine Eckert, Fedor Iskhakov, Jordan Louviere, and Susan Thorp

We quantify the widespread and significant economic impact of first impressions and confirmation bias in the financial advice market. We use a theoretical learning model and new experimental data to measure how these biases can evolve over time and change clients’ willingness to pay advisers. Our model demonstrates that clients’ confirmation bias will reinforce the effect of first impressions. Our results also lend support, in a new financial context, to theoretical models of learning under limited memory where people use unclear signals to confirm and reinforce their current beliefs. We find that almost two thirds of the participants in our experiment make choices that are consistent with a limited memory updating process: they interpret unclear advice to be good advice when it comes from the adviser they prefer. Our results show that models that account for behavioral factors such as confirmation bias may be needed to explain some financial decisions.