Looking Ahead - Time Preferences, Savings and Retirement

(w/ Max Groneck, draft available on request)

We study reforms of the social security system within a dynamic life cycle model of savings, bequests and endogenous labor supply choices. The model will be estimated using the method of simulated moments. We aim to improve the identification of several crucial preference parameters. To this end, we exploit a retirement reform in the Netherlands from 2006 that reduced early retirement rules for specific cohorts and which acts as a natural experiment for our structural estimation. In particular, the additional moments help us to simultaneously identify the discount function and the parameter governing consumption smoothing over time.

Part-time Wage Penalties across the Working Hours Distribution

(w/ Fabian Stürmer-Heiber, draft available on request)

What are the implications of splitting work more equally among spouses? We investigate heterogeneity of wages and wage growth rates across different working hours by linking German administrative and survey data. To account for endogenous selection into specific hours, we exploit reforms of the tax system along with conventional instruments. We find substantial heterogeneity in part-time wage penalties, ranging from −2% to −18% compared to full-time. The heterogeneity in wage growth penalties is similar, but less severe. Both penalties are not linearly decreasing in working hours. High penalties for working high part-time hours suggest that splitting work equally would imply sizeable wage losses.

Identifying and Estimating Beliefs from Choice Data - An Application to Female Labor Supply

This paper investigates the life cycle costs of being too overconfident about future employment possibilities. Focusing on women who experience child-related career breaks, a dynamic discrete choice model of female labor supply is estimated. A novel strategy is developed to identify expectations about future employment possibilities from labor supply choices. The strategy exploits reactions at the end of employment protection for mothers who have been regularly employed before the birth of a child. Reforms that change the length of this protection period allow to separately identify each of expectations, job-arrival rates, and preferences. Validated by suggestive evidence, the estimated life cycle model indicates that expectations are substantially upwards biased: on average women expect the half-yearly job arrival rate to be 1.6 times as high as the actual rate. This overconfidence significantly prolongs child-related career breaks and increases the number of mothers who never return to employment. Although lifetime labor market earnings drop by 14% when overconfident, individual consumption decreases only by around 4%. This difference is due to joint taxation, and most husbands are continuously working full-time while mothers tend to work part-time.

Identification of Time Preferences in Dynamic Discrete Choice Models: Exploiting Choice Constraints

This paper studies sufficient conditions for the identification of the exponential discount factor in dynamic discrete choice models, with a focus on models in which decision makers might only be able to choose from a subset of all potential alternatives. The presented exclusion condition requires variation in the probability of being “choice constrained”. Variation in such constraining probabilities that does not affect utilities or transition probabilities leads to point identification of the exponential discount factor. The derived identifying equation aligns with economic intuition. Some examples are provided.

Time Preferences and Female Labor Supply

(w/ Peter Haan, Luke Haywood, draft available on request)

We estimate a dynamic life-cycle model of labor supply with a focus on women's time preferences. We extend the dynamic discrete choice model of female labor supply to accommodate potentially time-inconsistent behavior. To identify time preferences, we exploit natural experiments: we use several parental leave reforms in Germany which extend parental leave from one to three years. Preliminary results provide evidence for significant time-inconsistency. Child-related career breaks are, on average longer when women exhibit time-inconsistent behavior. Our approach allows us to shed light on the importance of time preferences in explaining important labor supply choices.

Part-time work in the Netherlands

(w/ Agnieszka Postepska)

Reference dependent preferences and working reduced hours

(w/ Agnieszka Postepska)