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RETIREMENT BEHAVIOR and DISASTER RELIEF By ESSAYS ON PUBLIC FINANCE: RETIREMENT BEHAVIOR AND DISASTER RELIEF by Thomas Eisensee INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES Stockholm University Monograph Series No. 54 2005 THE INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES University of Stockholm is an institute for independent scholarly research in the field of international economic relations. DIRECTOR: Torsten Persson, Professor of Economics DEPUTY DIRECTOR: Mats Persson, Professor of Economics BOARD OF GOVERNORS: Kåre Bremer, Professor, President, Stockholm University, Chairman Ulf Jakobsson, Director of the Research Institute of Industrial Economics Leif Lindfors, University Director Sven-Olof Lodin, Professor Karl O. Moene, Professor Lars-Göran Nilsson, Professor Mats Persson, Professor Torsten Persson, Professor Michael Sohlman, Executive Director of the Nobel Foundation Eskil Wadensjö, Professor RESEARCH STAFF AND VISITING FELLOWS 2004/2005: Professors Natalie Pienaar Davide Ticchi Lars Calmfors José Mauricio Prado, Jr. Università degli Studi di Urbino "Carlo Bo" Harry Flam Virginia Queijo Harald Uhlig John Hassler Zheng (Michael) Song Humboldt University Henrik Horn Ulrika Stavlöt Justin Wolfers Assar Lindbeck Mirco Tonin University of Pennsylvania Mats Persson Gisela Waisman Joseph Zeira Torsten Persson Hebrew University Jerusalem Peter Svedberg Fabrizio Zilibotti Visiting Fellows Gino Gancia Visiting Professors University Pompeu Fabra Per Krusell Martín Gonzalez-Eiras Kjetil Storesletten Universidad de San Andrés Jean Imbs University of Lausanne and Research Fellows London Business School Nicola Gennaioli Paul Klein Ethan Kaplan University of Western Ontario Jesper Lindé (visiting) Jo Thori Lind Dirk Niepelt University of Oslo David Strömberg Egil Matsen Jakob Svensson Norwegian University of Science and Technology, Trondheim Graduate Students Andrea Moro Martin Bech Holte University of Minnesota Martina Björkman Anders Olofsgård Alessandra Bonfiglioli Georgetown University Thomas Eisensee Gérard Roland Giovanni Favara University of California, Berkeley Daria Finocchiario Betsey Stevenson Erika Färnstrand University of Pennsylvania Mathias Herzing Lars E.O. Svensson Anna Larsson Princeton University Martin Ljunge MAIL ADDRESS: S-106 91 STOCKHOLM, SWEDEN STREET ADDRESS: Universitetsvägen 10 A, 8th floor ESSAYS ON PUBLIC FINANCE: RETIREMENT BEHAVIOR AND DISASTER RELIEF by Thomas Eisensee INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES Stockholm University January 2006 © Copyright Thomas Eisensee, 2006. All rights reserved. Institute for International Economic Studies Stockholm University ISBN 91-7155-197-2 Printed by Akademitryck AB Edsbruk, Sweden 2006 Doctoral Dissertation Department of Economics Stockholm University ABSTRACT This thesis consists of three self-contained essays. The …rst essay is an empirical analysis of the relationship between news coverage of disasters and the provision of disaster relief. The two last essays deal with the relationship between …scal policy and the retirement decision. News Droughts, News Floods and U.S. Disaster Relief studies the mass media’s in‡uence on the U.S. government response to approximately 5,000 natural disasters in developing countries in 1968-2002. These disasters took around 63,000 lives and a¤ected 125 million people per year. Given the huge losses involved, it is essential that disaster relief is provided to those most in need. We show that U.S. disaster relief depends on the occurrence of other newsworthy events at the time of the disaster, such as the Olympic Games or the O.J. Simpson Trial, which are obviously unrelated to need. We argue that the only plausible explanation for this is that relief decisions are driven by news coverage of disasters, and that this news coverage might be crowded out by other newsworthy material. Fiscal Policy and Retirement in the Twentieth Century proposes a model that explains the trend in labor supply among older workers through changes in …scal pol- icy, including social security. The model emphasizes the general equilibrium e¤ects of …scal policy on retirement behavior. In particular, the radical shift in …scal policy at the beginning of the century raised the returns to savings, which induced workers to retire earlier. The model predicts a large change in the retirement age upon the introduction of social security, while subsequent increases in replacement rates are shown to have a small impact on retirement. Speci…cally, the retirement elasticity is found to be a decreasing and convex function of the replacement rate. The essay re-introduces social security as a major determinant of retirement behavior in the second half of the twentieth century, while simultaneously o¤ering an explanation to the two main puzzles in the literature: (i) the small contemporary retirement elasticities and (ii) the drop in the retirement age prior to the introduction of social security. Sustainable Fiscal Policy and the Retirement Decision concerns the sustainability of …scal policy in aging economies and the retirement decision. The essay develops an applied general equilibrium overlapping generation model calibrated to the U.S. iii economy, where retirement behavior is endogenous and current …scal policy is a response to future demographic developments. Three distinguishing sustainable policies are analyzed: (1) raising taxes only (2) reducing the replacement rate only and (3) raising the Full Retirement Age (FRA) only. All policies are found to have a substantial impact on retirement behavior. In particular, sustaining …scal policy will result in falling interest rates, inducing a general delay in retirement. This general equilibrium e¤ect on retirement behavior can be substantially larger than the direct e¤ect of changing social security incentives. However, although the delay in retirement reduces the burden of an aging population, the required …scal adjustments are large. The reason is that U.S. social security is roughly actuarially fair, which implies that delayed retirement only has a small e¤ect on public co¤ers. iv ACKNOWLEDGMENTS I would like to express my gratitude to all those who gave me the possibility to complete this thesis. I want to thank the Institute for giving me the opportunity to work here as a research assistant and later as a graduate student. My gratitude goes especially to my advisors, Fabrizio Zilibotti and Kjetil Storesletten: Thanks for sharing your knowledge, creative ideas and great enthusiasm. Not least, I am grateful for your support and patience. I am also indebted to my co-author David Strömberg whose dedication and e¤ectivity is highly contageous. It has been a great joy and inspiration to work with you. I would also like to thank the Wallis Institute at University of Rochester for their hospitality during my 6 months stay and Per Krusell for several insightful discussions. Also, thanks to the crowd of graduate students in Rochester who gave Gabriela and I a very hearty welcome. Warm thanks to all my teachers, collegues and friends who has made life at the Institute more enjoyable. A special thanks goes to Annika Andreasson, Conny Olovsson, Ulrika Stavlöt and Mathias Herzing for their support and inspiration. Editorial and administrative assistance from Christina Lönnblad and Annika An- dreasson has been deeply appreciated. For …nancial support, I thank Tore Browaldh’s Foundation, Jan Wallander’s and Tom Hedelius’ Foundation and Finanspolitiska Forskningsinstitutet. My greatest gratitude belong to my wife, Gabriela, and daughter, Clara; your constant support, patience and encouragement has been invaluable in the completion of this thesis. v vi TABLE OF CONTENTS Chapter 1: Introduction 1 Chapter 2: News Droughts, News Floods and U.S. Disaster Relief 5 Chapter 3: Fiscal Policy and Retirement in the Twentieth Century 49 Chapter 4: Sustainable Fiscal Policy and the Retirement Decision 83 vii viii !F9SWCU 'QWURBXAWGRQ 0C`V 9QB "GV9VWCU 4CIGCD ! " # $ $ " $ % &'((( )*+ , $ - . / 0 ) * / 0 1 12 # 3 % 3 $ 4 5 6 1 7 1 # $ $GVA9I 2RIGAb 9QB WFC 4CWGUCPCQW "CAGVGRQ 8 9 8 7# ' 7# : 7# ;< )=(( &' # - 88 " # $ 8 # $ >
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