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Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints

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  • Juan A. Rojas

    ()
    (Banco de España)

  • Carlos Urrutia

    ()
    (Centro de Investigación Económica, Instituto Tecnológico Autónomo de México (ITAM))

Abstract

We study the aggregate effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the borrowing constraint in the unique asset is endogenously determined by the agents' incentives to default on previous debts. We find that a model with fixed borrowing constraints overestimates the positive effect of reforming social security on the capital stock and the saving rate, compared to our model with endogenous borrowing limit. The reason is that, in the latter, the size of precautionary savings is smaller because after the reform the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits. Adding retirement accounts to the basic model does not change these conclusions, although the quantitative importance of endogenizing borrowing constraints is reduced.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0602e.pdf
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0602.

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Length: 46 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:bde:wpaper:0602

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Keywords: social security; borrowing constraints; retirement accounts;

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Cited by:
  1. Hans Fehr & Christian Habermann & Fabian Kindermann, 2006. "Social Security with Rational and Hyperbolic Consumers," Working Papers, Bavarian Graduate Program in Economics (BGPE) 010, Bavarian Graduate Program in Economics (BGPE).
  2. Fang Yang, 2012. "Social Security Reform with Impure Intergenerational Altruism," Discussion Papers, University at Albany, SUNY, Department of Economics 12-01, University at Albany, SUNY, Department of Economics.
  3. Marcelo Santos & Pedro Cavalcanti Ferreira, 2011. "The Effect of Social Security, Health, Demography and Technology on Retirement," 2011 Meeting Papers 903, Society for Economic Dynamics.
  4. Ferreiray, Pedro Cavalcanti & Santos, Marcelo Rodrigues, 2012. "The Effect of Social Security, Health, Demography and Technology on Retirement," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_274, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  5. Kumru, Cagri S. & Thanopoulos, Athanasios C., 2011. "Social security reform with self-control preferences," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7-8), pages 886-899, August.
  6. Kumru, Çagri S. & Thanopoulos, Athanasios C., 2008. "Social security and self control preferences," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(3), pages 757-778, March.
  7. Cagri Seda Kumru & Athanasios C. Thanopoulos, 2009. "Social Security Reform and Temptation," CESifo Working Paper Series 2778, CESifo Group Munich.
  8. Tetsuo Ono, 2007. "Unemployment dynamics in an OLG economy with public pensions," Economic Theory, Springer, Springer, vol. 33(3), pages 549-577, December.

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