Abstract:
Elderly workers in developing countries face certain frictions, such as credit constraints, in their retirement decisions that may not be as common among their counterparts in the developed world, and these concerns may lead workers to work more or less than their preferred number of years. In this study, I firstly use regression discontinuity methods to show that a large fraction of urban male heads of households in Brazil (roughly 45%) react contemporaneously to pension eligibility by retiring. Because retirement is not required to receive the pension, workers should not react contemporaneously unless optimization frictions, such as credit constraints, are at work. Secondly, I show that those in demographic groups more likely to be credit constrained are more reactive to pension eligibility. Thirdly, I develop a model of retirement decisions that explores how pensions in the face of credit constraints can influence such decisions, and I use this model to determine how the excessive generosity of pensions can explain the observed behavior over and above the simple credit constraint story. The model I develop allows me to estimate the welfare consequences of both the credit constraints and the generosity of the pension system.