II. The Option Value Model
The model proposed here incorporates the advantages of both of the
approaches described above. It allows updating of information, as does the
traditional hazard model, but also considers potential compensation many years
in the future, as does the nonlinear budget constraint approach. Antecedents
of our work begin with Lazear and Moore [1988], who argue that the option
value of postponing retirement is the appropriate variable to enter in a
regression equation explaining retirement.5 Our model is close in spirit to
the stochastic dynamic programming model of Rust