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Short horizons, time inconsistency, and optimal social security

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  • T. Findley

    ()

  • Frank Caliendo

Abstract

We study the optimal provision of social security in a dynamically efficient economy using a continuous-time overlapping-generations model in which consumers have short planning horizons. The short-horizon mechanism leads to dynamic optimization that is time-inconsistent over the life cycle. Our calibrated general-equilibrium results are generally supportive of social security for a wide array of social welfare functions. Thus, the basic life-cycle model can be augmented with only this slight twist in order to rationalize a social security program with the current U.S. tax rate. Copyright Springer Science+Business Media, LLC 2009

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File URL: http://hdl.handle.net/10.1007/s10797-009-9115-2
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 16 (2009)
Issue (Month): 4 (August)
Pages: 487-513

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Handle: RePEc:kap:itaxpf:v:16:y:2009:i:4:p:487-513

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Short planning horizons; Time-inconsistent preferences; Social security; Optimal taxation; Dynamic optimization; Life-cycle consumption; Dynamic welfare analysis; H55; D91; C61;

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References

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  1. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
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  13. Caliendo, Frank & Aadland, David, 2007. "Short-term planning and the life-cycle consumption puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1392-1415, April.
  14. T. Findley & Frank Caliendo, 2008. "The behavioral justification for public pensions: a survey," Journal of Economics and Finance, Springer, vol. 32(4), pages 409-425, October.
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  18. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
  19. Kumru, Çagri S. & Thanopoulos, Athanasios C., 2008. "Social security and self control preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 757-778, March.
  20. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Frank Caliendo & T. Findley, 2013. "Limited computational ability and social security," International Tax and Public Finance, Springer, vol. 20(3), pages 414-433, June.
  2. Y. Hossein Farzin & Ronald Wendner, 2014. "The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning," Graz Economics Papers 2014-04, University of Graz, Department of Economics.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  4. T. Findley & Frank Caliendo, 2008. "The behavioral justification for public pensions: a survey," Journal of Economics and Finance, Springer, vol. 32(4), pages 409-425, October.
  5. Frank Caliendo & Emin Gahramanov, 2013. "Myopia and pensions in general equilibrium," Journal of Economics and Finance, Springer, vol. 37(3), pages 375-401, July.
  6. Gahramanov, Emin & Tang, Xueli, 2013. "A mixed blessing of lifespan heterogeneity," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 142-153.
  7. CREMER, Helmuth & PESTIEAU, Pierre, 2010. "Myopia, redistribution and pensions," CORE Discussion Papers 2010038, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Farzin, Y. Hossein & Wendner, Ronald, 2014. "The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning," MPRA Paper 54614, University Library of Munich, Germany.
  9. Caliendo, Frank N. & Findley, T. Scott, 2013. "Time inconsistency and retirement planning," Economics Letters, Elsevier, vol. 121(1), pages 30-34.
  10. Caliendo, Frank N., 2011. "Time-inconsistent preferences and social security: Revisited in continuous time," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 668-675, May.
  11. Gahramanov, Emin, 2013. "Survival misperception, time inconsistency, and implications for life-cycle saving and welfare," Economic Modelling, Elsevier, vol. 32(C), pages 539-550.

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