What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data

Authors

• Hugo Benítez-Silva
• Debra Sabatini Dwyer

Abstract

This paper tests the Rational Expectations (RE) hypothesis regarding retirement expectations, controlling for sample selection, reporting biases, and unobserved heterogeneity. We find that retirement expectations in the Health and Retirement Study (HRS) are consistent with the RE hypothesis. We also examine how a wide array of factors, such as wealth, income, health insurance, pensions, and health status influence retirement expectations formation using panel data from all available waves of the HRS. We further analyze how new information affects the evolution of retirement expectations and discover that, on average, individuals correctly anticipate most uncertain events when planning their retirement, except for some health conditions and economic factors. Our results have important implications for a wide variety of models in economics that assume rational behavior.

Citation

Benitez-Silva, Hugo, and Dwyer, Debra Sabatini. “The Rationality of Retirement Expectations and the Role of  New Information.” Review of Economic Statistics 87, no.3 (2005): 587-592.

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Project

• UM02-11: Dynamic Retirement Expectations using the Health and Retirement Study

Paper ID

WP 2003-037

Publication Type

Working Paper

Publication Year

2003