A One-Sector Neoclassical Growth Model with Endogenous Retirement

This paper extends Diamond’s overlapping generations model by allowing the agents to make the retirement decision. Earning a higher wage income when young not only enables the agents to save more. It also induces more agents to retire early and gives an additional incentive to save more for retirement. This leads to a higher capital–labour ratio in the following period and hence the next generation of agents earns a higher wage income when young. Due to this positive feedback mechanism, endogenous retirement magnifies the persistence of growth dynamics and even generates multiple steady-states for empirically plausible parameter values.