TY - BOOK AU - Bodie,Zvi AU - Merton,Robert C. AU - Samuelson,William F. ED - National Bureau of Economic Research. TI - Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model T2 - NBER working paper series PY - 1992/// CY - Cambridge, Mass. PB - National Bureau of Economic Research N1 - January 1992; Hardcopy version available to institutional subscribers N2 - This paper examines the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle. The model incorporates the fact that individuals may have considerable flexibility in varying their work effort (including their choice of when to retire). Given this flexibility, the individual simultaneously determines optimal levels of current consumption, labor effort, and an optimal financial investment strategy at each point in his life cycle. We show that labor and investment choices are intimately related. The ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante. The model explains why the young (enjoying greater labor flexibility over their working lives) may take greater investment risks than the old. It also offers an explanation as to why consumption spending is relatively "smooth" despite volatility in asset prices. Finally, the paper provides a compact method for valuing the risky cash flows associated with future wage income UR - https://www.nber.org/papers/w3954 UR - http://dx.doi.org/10.3386/w3954 ER -