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The intergenerational state: education and pensions

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Author Info
Michele Boldrin
Ana Montes

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Abstract

When credit markets to finance investment in human capital are missing, the competitive equilibrium allocation is inefficient. When generations overlap, this failure can be mitigated by properly designed social arrangements. We show that public financing of education and public pensions can be designed to implement an intergenerational transfer scheme supporting the complete market allocation. Neither the public financing of education nor the pension scheme we consider resemble standard ones. In our mechanism, via the public education system, the young borrow from the middle aged to invest in human capital. They pay back the debt via a social security tax, the proceedings of which finance pension payments. When the complete market allocation is achieved, the rate of return implicit in this borrowing-lending scheme should equal the market rate of return.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 336.

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Date of creation: 2004
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Publication status: Published in Review of Economic Studies> (Vol. 72, No. 3, July 2005, pp. 651-664)
Handle: RePEc:fip:fedmsr:336

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Keywords: Social security;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Robert C. Merton, 1981. "On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital Is Not Tradeable," NBER Working Papers 0743, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-91, April. [Downloadable!] (restricted)
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  3. Cremer, Helmuth & Kessler, Denis & Pestieau, Pierre, 1992. "Intergenerational transfers within the family," European Economic Review, Elsevier, vol. 36(1), pages 1-16, January. [Downloadable!] (restricted)
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  4. Becker, Gary S & Murphy, Kevin M, 1988. "The Family and the State," Journal of Law & Economics, University of Chicago Press, vol. 31(1), pages 1-18, April.
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  5. Giorgio Bellettini & Carlotta Berti Ceroni, 1999. "Is Social Security Really Bad for Growth?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 796-819, October. [Downloadable!] (restricted)
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  6. Barro, Robert J & Becker, Gary S, 1989. "Fertility Choice in a Model of Economic Growth," Econometrica, Econometric Society, vol. 57(2), pages 481-501, March. [Downloadable!] (restricted)
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  7. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  8. Antonio Rangel, 1999. "Forward and Backward Intergenerational Goods: A Theory of Intergenerational Exchange," Working Papers 00001, Stanford University, Department of Economics. [Downloadable!]
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  9. Neher, Philip A, 1971. "Peasants, Procreation, and Pensions," American Economic Review, American Economic Association, vol. 61(3), pages 380-89, June.
  10. Michele Boldrin, 1993. "Public Education and Capital Accumulation," Working Papers 9301, Centro de Investigacion Economica, ITAM.
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  11. Cass, David, 1972. "Distinguishing inefficient competitive growth paths: A note on capital overaccumulation and rapidly diminishing future value of consumption in a fairly general model of capitalistic production," Journal of Economic Theory, Elsevier, vol. 4(2), pages 224-240, April. [Downloadable!] (restricted)
  12. Ana Montes, 2002. "Educación para los jóvenes y pensiones para los mayores: ¿Existe alguna relación? Evidencia para España," Investigaciones Economicas, Fundación SEPI, vol. 26(1), pages 145-185, January. [Downloadable!]
  13. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January. [Downloadable!] (restricted)
  14. Kotlikoff, Laurence J & Persson, Torsten & Svensson, Lars E O, 1988. "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem," American Economic Review, American Economic Association, vol. 78(4), pages 662-77, September. [Downloadable!] (restricted)
  15. Laurence J. Kotlikoff & Torsten Persson & Lars E.O. Svensson, 1988. "Laws as Assets: A Possible Solution to the Time Consistency Problem," NBER Working Papers 2068, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Michele Boldrin & Larry E. Jones, 2002. "Mortality, Fertility, and Saving in a Malthusian Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 775-814, October. [Downloadable!] (restricted)
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