Option Value of Lifetime Labor Income and Optimal Retirement Decision: A Binomial Tree Approach

In this paper, we consider the retirement and financial choice problem of an economic agent and solve it by the binomial tree model. In the dual martingale approach we take, the decisions are made by measuring the shadow price of personal wealth. We take an American option-type interpretation of the opportunity to work to evaluate the retirement decision. Different from previous infinite horizon models, here we provide a finite horizon framework where the maturity time can be comparable. We also present comparative static results for the retirement boundary.