TY  - JOUR
AU  - Bodie,Zvi
AU  - Merton,Robert C.
AU  - Samuelson,William F.
TI  - Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3954
PY  - 1992
Y2  - January 1992
UR  - http://www.nber.org/papers/w3954
L1  - http://www.nber.org/papers/w3954.pdf
N1  - Author contact info:
Zvi Bodie
School of Management, room 534
Boston University
595 Commonwealth Ave.
Boston, MA   02215
Tel: 617-353-4160
E-Mail: zbodie@bu.edu

Robert C. Merton
Massachusetts Institute of Technology
Sloan School of Management, E62-634
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: 617 715 4866
E-Mail: rmerton@mit.edu
AB  - This paper examines the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle. The model incorporates the fact that individuals may have considerable flexibility in varying their work effort (including their choice of when to retire). Given this flexibility, the individual simultaneously determines optimal levels of current consumption, labor effort, and an optimal financial investment strategy at each point in his life cycle. We show that labor and investment choices are intimately related. The ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante. The model explains why the young (enjoying greater labor flexibility over their working lives) may take greater investment risks than the old. It also offers an explanation as to why consumption spending is relatively "smooth" despite volatility in asset prices. Finally, the paper provides a compact method for valuing the risky cash flows associated with future wage income.
ER  -