The boom and bust in the stock market resulted in large wealth changes for some groups of the population. The changes were likely largely unanticipated in that the stock valuations deviated substantially from historical trends. These wealth changes were particularly important to those approaching retirement because of their inability to re-optimize over a long time horizon; thus, the wealth changes should have affected behavior in a measurable way. In this proposed research we will treat the wealth changes associated with the boom and bust like the experiment of giving some part of the population a windfall gain or loss of wealth, and we will study the consequences. We will compare these results with those from conventional panel estimation such as retirement hazards which take wealth to be exogenous. We will use a life-cycle model as the framework for analyzing the retirement and saving decisions. An important indirect effect of the wealth gains or losses on retirement or saving could be via changes in health: the link between socio-economic status and health is well-established, but the causal mechanism is the subject of considerable dispute. We will find whether the gains or losses in the stock market affected self-assessed health, which could have a subsequent affect on retirement and saving. We will find whether there are asymmetries in response: that is, do retirement, consumption and health change differently for stock market gains than for losses.

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National Institute on Aging (NIA)
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Rand Corporation
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