p.1151

Pensions, the Option Value of Work, and Retirement

James H. Stock
David A. Wise

Abstract

The effects of firm pension plan provisions on the retirement decisions of older employees are analyzed. The empirical results are based on data from a large firm, with a typical defined benefit pension plan. The "option value" of continued work is the central feature of the analysis. Estimation relies on a retirement decision rule that is close in spirit to the dynamic programming rule but is considerably less complex than a comprehensive implementation of that rule, thus greatly facilitating the numerical analysis.