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Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists

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Author Info
Pesando, James E

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Abstract

In analyzing corporate pension plans, financial economists typically invoke the spot model of the labor market, where the worker's cash wage plus accruing pension benefit equals the value of his marginal product each period. This paper provides evidence again st the empirical validity of this model, using provisions common to m ost pension plans. Incentive effects, ruled out by the spot model, ma y help explain certain well known "puzzles," such as the failure of employers to fully fund their plans despite the tax advantages of do ing so. Copyright 1987 by Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 25 (1987)
Issue (Month): 2 (April)
Pages: 215-38
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Handle: RePEc:oup:ecinqu:v:25:y:1987:i:2:p:215-38

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  1. J. Michael Harrison & William F. Sharpe, 1982. "Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans," NBER Working Papers 0935, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Pesando, James E, 1982. " Investment Risk, Bankruptcy Risk, and Pension Reform in Canada," Journal of Finance, American Finance Association, vol. 37(3), pages 741-49, June. [Downloadable!] (restricted)
  3. Martin Feldstein & Randall Morck, 1985. "Pension Funding Decisions, Interest Rate Assumptions and Share Prices," NBER Working Papers 0938, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September. [Downloadable!] (restricted)
  5. Ippolito, Richard A, 1985. "The Economic Function of Underfunded Pension Plans," Journal of Law & Economics, University of Chicago Press, vol. 28(3), pages 611-51, October.
  6. Jeremy I. Bulow & Myron S. Scholes, 1982. "Who Owns the Assets in a Defined Benefit Pension Plan," NBER Working Papers 0924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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