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


  • The authors are grateful to an anonymous referee, Victoria Prowse, Hugo Benitez-Silva, Axel Börsch-Supan, Christopher Flinn, Elsa Fornero, Eric French, Mike Hurd, Adriaan Kalwij, Consuelo Nava, Steffen Reinhold, John Rust, Daniël van Vuuren for their useful comments. They also appreciate comments from participants at the ESPE 2010 and ICEEE 2011 conferences, at the seventh workshop Marie Curie Research Training Network–The Economics of Ageing, at the workshop for the presentation of Ph.D. DSE thesis and at the seminars at MEA-Mannheim and the Central Planning Bureau. This research is partly supported by a grant from the Italian Ministry of Education, University and Research (MIUR). All opinions and errors are those of the authors alone.


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.