The paper analyses the relationship between returns and the investment choices of small entrepreneurs in the U.S., exploiting public data on private retirement accounts in the period 1999-2017. The goal is to assess whether these small entrepreneurs behave as rational agents in their decisions about the allocation of retirement savings, i.e. in line with the results of life-cycle models concerning the maximization of consumption under budget constraints.
As returns on retirement accounts increase, entrepreneurs react by raising their contributions much more than predicted by life-cycle models. This behavior is robust to controls for macroeconomic conditions, financial illiteracy, transaction costs, and informational frictions; it can instead be explained by the hypothesis that a positive shock to an account's returns drives a permanent increase in expected returns.
