Optimal retirement with borrowing constraints and forced unemployment risk

We advance a model of consumption, retirement, and asset allocation in an incomplete market in which an individual is subject to risk of involuntary permanent unemployment that reduces her income severely, and has borrowing constraints. We show that the interactions among consumption and portfolio choice can induce early retirement even when forced unemployment risks and borrowing constraints are considered jointly. We demonstrate that providing private unemployment insurance in an incomplete market is bene cial to poor people and for people with a low post-retirement leisure preference, and that the insurance can be privately priced and be sold by private insurance providers.