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It is well accepted that households increase consumption of goods and services in response to an unexpected increase in wealth. Consensus estimates of this wealth effect are in the range of 3 to 5 cents of additional consumption spending for each additional dollar of wealth. Economic theory also suggests that consumption of leisure, like consumption of goods and services, should increase with positive shocks to wealth. In this paper, we ask whether the run-up in equity prices during the 1990s led people to consume more leisure by retiring earlier than they had planned. We are able to identify the effect of unanticipated changes in wealth effect by exploiting unique expectations data in the Health and Retirement Survey (HRS). Our results suggest that households that held corporate equity immediately prior to the bull market of the 1990s were more likely to retire "early". The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Board or its staff.

Wealth Effects and the Consumption of Leisure: Retirement Decisions During the Stock Market Boom of the 1990s