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On the optimal size of Social Security in the presence of a stock market

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  • Hillebrand, Marten

Abstract

The paper develops a stylized overlapping generations economy with random production and a stock market. The impact of a Social Security system on production, asset markets, and consumer welfare is analyzed. It is shown that any reduction in the contribution rate fosters capital accumulation and increases asset prices, wages, and production output. Different welfare criteria are applied to determine the optimal size of Social Security. It is shown that there exists a unique contribution rate which is long-run optimal, socially optimal, and time-consistent in the sense that no generation has an incentive to change it.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 48 (2012)
Issue (Month): 1 ()
Pages: 26-38

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Handle: RePEc:eee:mateco:v:48:y:2012:i:1:p:26-38

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Social Security; Stock market; Overlapping generations; Capital accumulation; Long-run optimality; Social optimality; Time consistency;

References

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  1. Gabrielle Demange & Guy Laroque, 1999. "Social Security and Demographic Shocks," Econometrica, Econometric Society, vol. 67(3), pages 527-542, May.
  2. Peled, Dan, 1984. "Stationary pareto optimality of stochastic asset equilibria with overlapping generations," Journal of Economic Theory, Elsevier, vol. 34(2), pages 396-403, December.
  3. Demange, Gabrielle & Laroque, Guy, 2000. " Social Security, Optimality, and Equilibria in a Stochastic Overlapping Generations Economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 1-23.
  4. Subir Chattopadhyay & Piero Gottardi, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Working Papers 99-12, Brown University, Department of Economics.
  5. Henning Bohn, 2004. "Intergenerational Risk Sharing and Fiscal Policy," 2004 Meeting Papers 22, Society for Economic Dynamics.
  6. Magill, Michael & Quinzii, Martine, 2003. "Nonshiftable capital, affine price expectations and convergence to the Golden Rule," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 239-272, June.
  7. Hillebrand, Marten, 2011. "On the role of labor supply for the optimal size of Social Security," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1091-1105, July.
  8. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  9. Demange, G., 2000. "On Optimality of Intergenerational Risk Sharing," DELTA Working Papers 2000-05, DELTA (Ecole normale supérieure).
  10. Olovsson, Conny, 2010. "Quantifying the risk-sharing welfare gains of social security," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 364-375, April.
  11. Wang Yong, 1993. "Stationary Equilibria in an Overlapping Generations Economy with Stochastic Production," Journal of Economic Theory, Elsevier, vol. 61(2), pages 423-435, December.
  12. Zilcha, Itzhak, 1991. "Characterizing efficiency in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 55(1), pages 1-16, October.
  13. Hauenschild, Nils, 2002. "Capital Accumulation in a Stochastic Overlapping Generations Model with Social Security," Journal of Economic Theory, Elsevier, vol. 106(1), pages 201-216, September.
  14. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  15. Andrew B. Abel, 2002. "The effects of a baby boom on stock prices and capital accumulation in the presence of Social Security," Working Papers 03-2, Federal Reserve Bank of Philadelphia.
  16. Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-81, July.
  17. Dechert, W Davis & Yamamoto, Kenji, 1992. "Asset Valuation and Production Efficiency in an Overlapping-Generations Model with Production Shocks," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 389-405, April.
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