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arXiv · 1904.06520

Costly Attention and Retirement

Jamie Hentall-MacCuish
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Abstract

In UK data, I document the prevalence of misbeliefs regarding the State Pension eligibility age (SPA) and their predictivity for retirement. Exploiting policy variation, I estimate a lifecycle model of retirement in which, motivated by patterns in belief data, rationally inattentive households learning about uncertain pension policy endogenously generates misbeliefs. Misbeliefs explain 51% of the excessive (given financial incentives) drop in employment at SPA when constrained to replicate the belief data patterns and completely explain it when not. To achieve this, I develop a solution method for dynamic rational inattention models with persistent beliefs. Costly attention makes the SPA up to 15% less effective at increasing old-age employment. Hence, information letters improve welfare and increase employment.

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Jamie Hentall-MacCuish. 2019-04-13. Costly Attention and Retirement. https://arxiv.org/abs/1904.06520

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