Bayesian analysis of a dynamic stochastic model of labor supply and saving

This paper empirically implements a dynamic, stochastic model of life-cycle labor supply and human capital investment. The model allows agents to be forward looking. But, in contrast to prior literature in this area, it does not require that expectations be formed “rationally”. By avoiding strong assumptions about expectations, I avoid sources of bias stemming from misspecification of the expectation process. A Bayesian econometric method based on Geweke and Keane (in: R.S. Mariano, T. Schuermann, M. Weeks (Eds.), Simulation Based Inference and Econometrics: Methods and Applications, Cambridge University Press, Cambridge, 1999) is used to relax assumptions over expectations. The results of this study are consistent with findings from previous research in the labor supply literature that makes the rational expectations assumption.