Working Paper: NBER ID: w3043
Authors: Zvi Bodie; William Samuelson
Abstract: This paper develops a model showing that people who have flexibility in choosing how much to work will prefer to invest substantially more of their money in risky assets than if they had no such flexibility. Viewed in this way, labor supply flexibility offers insurance against adverse investment outcomes. The model provides support for the conventional wisdom that the young can tolerate more risk in their investment portfolios than the old. The model has other implications for the study of household financial behavior over the life cycle. It implies that households will take account of the value of labor supply flexibility in deciding how much to invest in their own human capital and when to retire. At the macro level it implies that people will have a labor supply response to shocks in the financial markets.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor supply flexibility (J20) | investment in risky assets (G11) |
| younger individuals (J14) | investment in risky assets (G11) |
| labor supply flexibility (J20) | risk tolerance in investment portfolios (G11) |
| life cycle stage (L26) | ability to adjust labor supply (J29) |
| investment outcomes (G11) | labor supply adjustments (J22) |