Retirement Choices in Italy: What an Option Value Model Tells Us*

Using Italian data, we estimate an option value model to quantify the effect of financial incentives on retirement choices. As far as we know, this is the first empirical study to estimate the conditional multiple‐years model put forward by Stock and Wise (1990) . This implies that we account for dynamic self‐selection bias. We also present an extended version of this model in which the marginal value of leisure is random. For the female sample, the model is able to predict almost perfectly the age‐specific hazard rates. For the male sample, we obtain a good fit. Dynamic self‐selection results in a downward bias in the estimate of the marginal utility of leisure. We perform a simulation study to gauge the effects of a dramatic pension reform. Underestimation of the value of leisure translates into sizeable over‐prediction of the impact of reform. Due to lack of data, results for males should be interpreted with caution since we are not able to fully correct for dynamic self‐selection bias.     

How real people make long-term decisions: The case of retirement preparation

Large variations in retirement wealth are common, with some households accumulating hundreds of thousands of dollars and others accumulating next to nothing. We examine to what extent formal planning or simple rules of thumb contribute to these differences in wealth accumulation. In particular, we investigate whether those who follow simple rules of thumb or those who come up with more complete plans accumulate more wealth than those who take an unsystematic approach. We test this empirically using a specifically designed survey about retirement preparation. We find that people who rely on a rule of thumb behave like literal planners. However, people without any systematic approach save substantially less. Our results, taken together with evidence from psychology, suggest that financial planning advice based on simple rules of thumb may be helpful for those who currently take no systematic approach.     

African Development: Beyond Income Convergence

In examining some big questions on African development, I provide evidence that the dynamics of some development indicators could support both endogenous and neoclassical growth theories in the convergence debate. This paper investigates convergence in real per capita gross domestic product and inequality‐adjusted human development in 38 African countries, disaggregated into 10 homogenous panels based on regions (Sub‐Saharan and North Africa), income levels (low, middle, lower middle and upper middle), legal origins (English common law and French civil law) and religious dominations (Christianity and Islam). The main finding is that the income component of the Human Development Index moves slower than others in the convergence process, and thus requires a more focused policy intervention. As a policy implication, looking beyond income convergence can provide a concrete agenda for development involving all aspects of economic, institutional and social life.     

Measuring Multi‐Membership in Economic Integration and Its Trade Impact: A Comparative Study of ECOWAS and SADC

One of the intriguing aspects of African regional trade agreements (RTAs) is the extent of multi‐membership, where many African countries are members of more than one RTA. Using a gravity model for 25 countries and the years 1980‐2006, we measure the extent of multi‐membership and compare its impact in two major African regional blocs, Economic Community of West Africa States (ECOWAS) and Southern Africa Development Community (SADC). We find that the impact of multi‐membership critically depends on the characteristics of the multi‐membership of regional integration initiatives. We find a positive impact if an additional membership complements the integration process of the original regional integration initiative: overlapping memberships had a much stronger and significant positive effect on bilateral trade within ECOWAS compare with an insignificant impact within the SADC.     

How Did the Elimination of the US Earnings Test above the Normal Retirement Age Affect Labour Supply Expectations?*

We look at the effect of the 2000 repeal of the earnings test above the normal retirement age on retirement expectations of workers in the Health and Retirement Study, aged 51 to 61 in 1992. For men, we find that those whose marginal wage rate increased when the earnings test was repealed, had the largest increase in the probability to work full-time past normal retirement age. We do not find significant evidence of effects of the repeal of the earnings test on the probability to work past age 62 or the expected claiming age. On the other hand, for those reaching the normal retirement age, deviations between the age at which Social Security benefits are actually claimed and the previously reported expected age are more negative in 2000 than in 1998. Since our calculations show that the tax introduced by the earnings test was small when accounting for actuarial benefit adjustments and differential mortality, our results suggest that although male workers form expectations in a way consistent with forward-looking behavior, they misperceive the complicated rules of the earnings test. Results for females suggest similar patterns but estimates are imprecise.     

The political economy of the G20 agenda on financial regulation

The paper empirically examines the implementation record of international financial regulation of the banking sector. The study finds that the size of the banking sector and the presence of global systemically important banks (G-SIBs) are positively associated with a stronger implementation record. These results suggest that cooperative motives of internalising externalities, creating a level playing field and preserving financial stability play a role in explaining the implementation record. We find evidence that this cooperative behaviour may be driven by the self-interest of global players as the positive record is particularly strong in countries where large banking sectors and big banks are both present, and where regulation only applies to large players. Sectoral concentration, bank health and the share of foreign ownership yield more mixed results as regards their impact on implementation.     

On government-created credit markets for education and endogenous growth

Interest in public loans to fund (higher) education has been increasing in the last decades. This paper explores the general welfare properties of government-created credit markets for education in a three-period overlapping generations model with physical and human capital. It shows that the mere existence of public credit markets is second-best in nature, and cannot decentralize the optimum. Achieving the first-best “Golden Rule” balanced growth path requires a government loan system that lends the amounts required for optimal investments in education and an optimally chosen pure pay-as-you-go social security system. Student loans and pensions thus appear as two inseparable elements of the policy that maximizes social welfare.     

Forecasting using supervised factor models

This paper examines the theoretical and empirical properties of a supervised factor model based on combining forecasts using principal components (CFPC), in comparison with two other supervised factor models (partial least squares regression, PLS, and principal covariate regression, PCovR) and with the unsupervised principal component regression, PCR. The supervision refers to training the predictors for a variable to forecast. We compare the performance of the three supervised factor models and the unsupervised factor model in forecasting of U.S. CPI inflation. The main finding is that the predictive ability of the supervised factor models is much better than the unsupervised factor model. The computation of the factors can be doubly supervised together with variable selection, which can further improve the forecasting performance of the supervised factor models. Among the three supervised factor models, the CFPC best performs and is also most stable. While PCovR also performs well and is stable, the performance of PLS is less stable over different out-of-sample forecasting periods. The effect of supervision gets even larger as forecast horizon increases. Supervision helps to reduce the number of factors and lags needed in modelling economic structure, achieving more parsimony.     

Terrain ruggedness and limits of political repression: Evidence from China’s Great Leap Forward and Famine (1959-61)

Chairman Mao Zedong’s Great Leap Forward development plan strongly affected food security in rural China at the time, given that many of the associated policies exploited rural labor and extracted resources. A few months after the plan’s initial implementation in August 1958, food shortages were reported; by the spring of 1961, more than 30 million citizens had died of starvation and famine-related illnesses. However, as the national plan was rolled out and then upheld over three years, on-the-ground implementation was nonuniform. Using georeferenced terrain ruggedness data which captures small-scale topological irregularities and information on provincial leadership attitudes towards Mao’s plan, I provide evidence on forces underlying the famine’s intensity and distribution. The analysis is based on a differential effect, in which a fear-based incentive structure characterizing the plan’s implementation is implicitly embedded. The baseline results indicate that rugged terrain protected more than 4.6 million rural Chinese from dying in the famine. By identifying an additional benefit of ruggedness to health and well-being in some rural communities, I show that not only does a causal relationship exist at a local level between Great Leap policies and famine mortality, but also that the lethality of the policies varied per state power at the time.     

Demographic Change and Pension Reform in Spain: An Assessment in a Two‐Earner,OLG Model*

Recent pension reforms in Spain have been guided by two opposite goals: achieving financial stability and improving redistributive aspirations. In particular, reforms implemented in 1997/2001 entailed a mixture of both through: (i) changes in the pension formula; (ii) the extension of entitlement to early retirement to all cohorts; and (iii) increases in survival pensions. This paper builds an applied general equilibrium OLG model that captures the fundamental non‐stationarity of the Spanish reality (ageing population, education transition and increasing female attachment to the labour market) to assess the impact of those reforms. As a novel feature with respect to the literature, households in our model economy are made up of two potential earners who make saving and labour supply decisions. Our main conclusions from the analysis are at three different levels. First, the Spanish pension system is clearly unsustainable, with pension expenditure reaching a figure of about 18 per cent of GDP in 2050, and the reforms have clearly been