Loretti I. Dobrescu

To Love or to Pay: Savings and Health Care in Older Age

This paper develops a dynamic structural lifecycle model to study how heterogeneous health and medical spending shocks affect the savings behavior of the elderly. Individuals are allowed to respond to health shocks in two ways: They can directly pay for their health care expenses (self-insure) or they can rely on health insurance contracts. There are two possible insurance options, one through formal contracts and another through informal care provided by family. Formal contracts may be affected by asymmetric information problems whereas informal insurance depends on social ties (cohesion) and on bequeathable wealth. I estimate the model on SHARE data using simulated method of moments for four levels of wealth in a sample of single retired Europeans. Counterfactual experiments show that health, medical spending, and health insurance are indeed the main drivers of the slow wealth decumulation in old age. I also find that social cohesion rises with age, declines with wealth, and is higher in Mediterranean countries than in Central European and Scandinavian countries. Finally, high social cohesion appears typically associated with increased life expectancy.

As Easy as Pie: How Retirement Savers Use Prescribed Investment Disclosures

Using a laboratory experiment, we study how retirement plan members choose investment options using five information items prescribed by regulators. We found that asset allocation information for pre-mixed investment options – normally presented as a pie chart or a table – had the largest impact on choices. Participants preferred investment options with more, and more evenly weighted, asset class allocations. This novel application of a 1/n strategy differs significantly from the existing findings of naive diversification in ‘mix-it-yourself’ conditions where participants spread resources evenly across funds or categories. When asset allocation information was included, coefficients on return and risk information had unexpected signs, but when asset allocation was omitted, participants preferred options with high Sharpe ratios. We also demonstrate that none of the five prescribed information items was significant in explaining individual choices of more than 35% of participants. These findings highlight that information contained in prescribed investment disclosures might not be used in the manner intended by the regulator. The results raise important methodological questions about the way ‘user-friendly’ information prescribed by regulators is validated before being legislated.

A Dynamic Economic Model with Discrete Time and Consumer Sentiment

The paper describes a dynamical economic model with discrete time and consumer sentiment in the deterministic and stochastic cases. We seek to demonstrate that consumer sentiment may create fluctuations in the economical activities. The model possesses a flip bifurcation and a Neimark-Sacker bifurcation, after which the stable state is replaced by a (quasi) periodic motion. We associate the difference stochastic equation to the model by randomizing the control parameter and by adding one stochastic control. Numerical simulations are made for the deterministic and stochastic models, for different values of the control parameter .

Retirement Savings: A Tale of Decisions and Defaults

We examine the behavior of members of an industry-wide pension fund to assess both the prevalence of defaults and their impact on retirement savings. Our empirical investigations show that preferences, demographic characteristics and labor mobility matter greatly when it comes to the low active plan choice (or high defaulting) and overall level of pension bene ts. Using a structural dynamic life-cycle model, we then evaluate the ability of these empirically motivated factors to explain retirement savings patterns. In our model, individuals decide how much to save in a setting that combines an irreversible automatic enrolment with an active decision regime. After automatic enrolment, there is an initial choice between two pension plans (de fined benefi t vs. defi ned contribution), and then members decide (possibly by default) their voluntary contributions and type of investment allocation. We estimate the model using the simulated method of moments on administrative data from a large Australian pension fund. Our results show that default settings strongly influence wealth accumulation. Such settings are also highly persistent, both over time and across decisions. Overall, our findings suggest that if defaults (particularly the irreversible ones) are not carefully designed, retirement savings can be severely a ffected.

Deterministic and Stochastic Three‐Sector Dynamic Growth Model with Endogenous Labour Supply

This study explores the stability of the stationary state for a dynamic growth model with wealth and human capital accumulation. Knowledge is created through research and learning-by-doing, while the time allocation between labour and leisure is endogenised. We analyse the model in both its deterministic and stochastic versions. First, we describe the deterministic model and analyse the stationary state. Second, using the stationary state, we define the stochastic perturbation and study the squared mean values of the system states for the linearised model. Third, we prove that for certain parameters, the stationary state in the deterministic model is asymptotically stable. Similarly, we also prove that the squared mean values of the variables in the linearised stochastic model are asymptotically stable. Finally, we perform the comparative dynamic analysis for the propensities to save and to enjoy leisure, the tax rates used to finance research and the knowledge utilisation efficiency.

The Impact of Social Activities on Cognitive Ageing: Evidence From Eleven European Countries

Using micro data from eleven European countries, we investigate the impact of being socially active on cognition in older age. Cognitive abilities are measured through scores on numeracy, fluency and recall tests. We address the endogeneity of social activities through panel data and instrumental variable methods. We find that social activities have an important positive effect on cognition, with the results varying by gender. Fluency is positively affected only in females, while numeracy only in males. Finally, recall is affected in both sexes. We also show that social activities, through their effect on cognition, influence positively households’ economic welfare.

Early Life Conditions and Financial Risk-Taking in Older Age

Using life-history survey data from eleven European countries, we investigate whether childhood conditions, such as socioeconomic status, cognitive abilities and health problems influence portfolio choice and risk attitudes later in life. After controlling for the corresponding conditions in adulthood, we find that superior cognitive skills in childhood (especially mathematical abilities) are positively associated with stock and mutual fund ownership. Childhood socioeconomic status, as indicated by the number of rooms and by having at least some books in the house during childhood, is also positively associated with the ownership of stocks, mutual funds and individual retirement accounts, as well as with the willingness to take financial risks. On the other hand, less risky assets like bonds are not affected by early childhood conditions. We find only weak effects of childhood health problems on portfolio choice in adulthood. Finally, favorable childhood conditions affect the transition in and out of risky asset ownership, both by making divesting less likely and by facilitating investing (i.e., transitioning from non-ownership to ownership).

Asset Price Dynamics in a Chartist-Fundamentalist Model with Time Delays

This paper studies the dynamic behavior of asset prices using a chartist - fundamentalist model with two speculative markets. To this effect, we employ a differential system with delays similar to Dibeh (2007) to describe the price dynamics and we assume that the two markets are coupled via diffusive coupling terms. We study two different time delay cases, namely when both markets experience the same time delay, and when the time delay is different across markets. First, we theoretically determine that the equilibrium exists and investigate its stability. Second, we establish the general conditions for the existence of local Hopf bifurcations and extensively analyze their direction and stability. The common conclusion from both the delay scenarios we consider is that coupled speculative markets with heterogeneous agents in each, but with different price dynamics, can be synchronized through diffusive coupling. Finally, we provide some numerical illustrations to confirm our theoretical findings.

The Impact of Childhood Health and Cognition on Portfolio Choice

Childhood health is by now recognized to influence future educational and economic outcomes. Children who experience poorer childhood health have significantly lower educational attainment, poorer health, and lower socioeconomic status as adults (Case et al. 2005; Currie 2009). For example, Case and Paxson (2008) investigated the relationship between height (as indicator for early health and socio-economic status), cognitive functions and health status at older ages and found that taller individuals (considered to be healthier and wealthier during childhood) have greater cognitive skills on average, report significantly fewer difficulties with activities of daily living, and are in considerably better physical and mental health.

The Cognitive Impact of Social Activities in Older Age

Using harmonized micro data from 17 European countries, we investigate the causal impact of being socially active on old age cognition. To this effect, we employ nonparametric bounds-based partial identification methods that require fairly weak assumptions. We find that social activities have a strong positive effect on cognition, as the narrowest identification regions of the treatment effect exclude zero. This result is more likely to hold for females than for males. We also provide evidence, again using bounds-based estimation, on the economic significance of social participation by examining the beneficial effect of higher cognition on households’ economic well-being.Using harmonized micro data from 17 European countries, we investigate the causal impact of being socially active on old age cognition. To this effect, we employ nonparametric bounds-based partial identification methods that require fairly weak assumptions. We find that social activities have a strong positive effect on cognition, as the narrowest identification regions of the treatment effect exclude zero. This result is more likely to hold for females than for males. We also provide evidence, again using bounds-based estimation, on the economic significance of social participation by examining the beneficial effect of higher cognition on households’ economic well-being.