Social Security and Risk Sharing
Title: Social Security and Risk Sharing
Citation: Journal of Economic Theory, 2011, 146, 3, 1078-1106
ISSN: 1095-7235; 0022-0531
In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex ante Pareto-improving in a stochastic OLG economy with capital accumulation and land. We argue that these conditions are consistent with realistic specifications of the parameters of the economy. In our model financial markets are complete and competitive equilibria interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents' welfare is evaluated ex ante, and arises from an improvement in intergenerational risk sharing. We also examine the optimal size of a given social security system as well as its optimal reform.
Subject: Intergenerational risk sharing; Social security; Ex ante welfare improvements; Social security reform; Price effects
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