What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data
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.
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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Paper IDWP 2003-037