Stochastic Life-cycle Model Research Articles

On the Rise of Health Spending and Longevity

We use a calibrated stochastic life-cycle model of endogenous health spending, asset accumulation and retirement to investigate the causes behind the increase in health spending and life expectancy over the period 1965-2005. We estimate that technological change along with the increase in the generosity of health insurance may explain independently 53% of the rise in health spending (insurance 29% and technology 24%) while income less than 10%. By simultaneously occurring over this period, these changes may have lead to a synergy or interaction effect which helps explain an additional 37% increase in health spending. We estimate that technological change, taking the form of increased productivity at an annual rate of 1.8%, explains 59% of the rise in life expectancy at age 50 over this period while insurance and income explain less than 10%.

What can the life-cycle model tell us about 401(k) contributions and participation?

This paper solves and simulates a stochastic life-cycle model of an economy with 401(k) plans. We use the model to establish a benchmark for patterns of contributions and participation and show how these patterns depend on such features as employer matching, vesting policies, and the ability to make early withdrawals. Consistent with empirical studies, the model predicts relatively low participation rates among younger workers and shows that these rates tend to rise with more generous matching, lower vesting periods, and improved liquidity.

Tax-Deferred Savings and Early Retirement

This paper analyzes the effects of tax-deferred accounts (TDAs) in a stochastic life-cycle model. The simulations reveal that conventional savings (CSAs) serve mainly for liquidity and TDAs for retirement and bequests. The tax incentives are generally effective in stimulating new savings for the middle and upper income groups. TDAs facilitates wealth accumulation, which perhaps unintentionally encourages earlier retirement. TDAs fail to induce new savings and affect the retirement choice for impatient and low-income individuals since they face lower marginal tax rates and have limited resources to take advantage of TDAs. They tend to retire and claim Social Security early.

Potential benefits of a conservation hatchery program for supplementing Oregon coast coho salmon (Oncorhynchus kisutch) populations: a stochastic model investigation

This study developed a stochastic life cycle model to simulate idealized supplementation strategies to investigate the following question: under what circumstances could hatchery fish stocking contribute to the recovery of Oregon coast coho salmon (Oncorhynchus kisutch)? Simulations were used to find a solution space, defined by the attributes of wild and hatchery-bred salmon, their offspring, and their environments, where hatchery fish could supplement natural production without further depressing it until natural or human factors restricting production were relieved. These simulations suggest that short-duration, tightly controlled, low-intensity conservation hatchery programs designed to minimize genetic and ecological risks may yield minor short-term increases in adult coho salmon abundance while posing significant ecological and genetic risks. No solution space was found that indicated clear long-term benefits from such a supplementation program. Of all the management actions modeled, habitat restoration offered by far the largest and only permanent gains in coho salmon abundance while posing no genetic or ecological risk to the fish. The modeled benefits of habitat restoration were significant regardless of assumptions made about the fitness of hatchery fish and their offspring.

Unemployment insurance and precautionary saving

Models of precautionary saving imply that households will hold more assets when faced with greater income uncertainty. However, previous empirical studies of income uncertainty have produced somewhat mixed support for the precautionary saving hypothesis. In this paper, we note that differences in the state-contingent income stream available to workers through the unemployment insurance (UI) program provides an excellent source of variation for testing the presence of a precautionary savings motive. Simulations of a stochastic life cycle model suggest that a UI system similar to the type currently in place in the U.S. can lead to a significant reduction in the assets accumulated by a median worker. Moreover, there is considerable variation in the UI benefit schedules for workers living in different states in the U.S., which provides an exogenous source of variation for empirically testing the precautionary saving hypothesis. We carry out this test using data on expected UI benefit replacement rates and financial assets held by households in the Survey of Income and Program Participation. Our empirical results are consistent with the predictions of the model and suggest that reducing the UI benefit replacement rate by 50 percent would increase gross financial asset holdings by 14 percent, or $241, for the average worker. We also find empirical evidence that this “crowd out” effect of UI on household saving is stronger for those facing higher unemployment risk and weaker for older workers, both of which are implications from our precautionary saving model.