Self-insurance in a life-cycle model of labour supply and savings

This paper analyses the incentives to work and to save over the life cycle in the presence of incomplete markets. In a calibrated, partial equilibrium model, flexibility in hours worked changes asset age-profiles: borrowing when young is greater and saving when middle-aged is greater than when labour supply is fixed. Uncertainty causes individuals to work longer hours and to consume less when young. With flexibility over hours, accumulating precautionary assets incurs less of a utility cost and so the level of saving is greater. Further, allowing for flexibility and uncertainty means simulated hours of work and consumption more closely match the age profiles in the data.