Retirement Decision : Does the discount function matter?

Some empirical studies show that the discount rate is higher for short horizons than for long horizons what suggests that the discount function would be hyperbolic or quasi-hyperbolic and not exponential. This paper examines how quasi-hyperbolic discounting influences the retirement decision with respect to exponential discounting. In a 3-period model in which the retirement decision is endogenous in period 2, we investigate whether people displaying a quasi-hyperbolic discount function retire earlier or later than people displaying an exponential discount function. We show that the retirement decision depends effectively on the discount function we consider and that quasi-hyperbolic discounting, even if it does not provide a general explanation for early retirement, may explain, in some cases, this phenomenon.