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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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Neher, Philip A, 1971. "Peasants, Procreation, and Pensions," American Economic Review, American Economic Association, vol. 61(3), pages 380-89, June.
  2. Michele Boldrin, 1993. "Public Education and Capital Accumulation," Working Papers 9301, Centro de Investigacion Economica, ITAM.
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  3. 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)
  4. 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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  5. 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)
  6. 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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  7. 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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  8. 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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  9. 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)
  10. 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)
  11. 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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  12. 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)
  13. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  14. 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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  15. 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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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Andolfatto & Martin Gervais, 2004. "Human Capital Investment and Debt Constraints," Labor and Demography 0412006, EconWPA. [Downloadable!]
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  2. Panu Poutvaara, 2003. "On the Political Economy of Social Security and Public Education," Public Economics 0303001, EconWPA. [Downloadable!]
    Other versions:
  3. Borys Grochulski & Tomasz Piskorski, 2007. "Risky human capital and deferred capital income taxation," Working Paper 06-13, Federal Reserve Bank of Richmond. [Downloadable!]
  4. Frédéric, DOCQUIER & Oliver, Paddison & Pierre PESTIEAU, 2006. "Optimal accumulation in an endogenous growth setting with human capital," Université catholique de Louvain, Département des Sciences Economiques Working Paper 2006022, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  5. Stéphane Zuber & Antoine Bommier & Jérôme Bourdieu & Akiko Suwa-Eisenmann, 2005. "Le développement des transferts publics d'éducation et d'assurance vieillesse par génération en France : 1850-2000," Research Unit Working Papers 0508, Laboratoire d'Economie Appliquee, INRA. [Downloadable!]
  6. Michele Boldrin, 2005. "Public Education and Capital Accumulation," Levine's Bibliography 172782000000000090, UCLA Department of Economics. [Downloadable!]
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  7. Martin Barbie & Marcus Hagedorn & Ashok Kaul, . "Fostering Within-Family Human Capital Investment: An Intragenerational Insurance Perspective of Social Security," IEW - Working Papers iewwp236, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  8. Marco Bassetto & Thomas J. Sargent, 2005. "Politics and efficiency of separating capital and ordinary Government budgets," Working Paper Series WP-05-07, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  9. Juergen Jung, 2008. "The Timing of Redistribution," Caepr Working Papers 2008-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  10. Borys Grochulski & Tomasz Piskorski, 2005. "Optimal wealth taxes with risky human capital," Working Paper 05-13, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  11. Jovan Zamac, 2005. "Pension Design when Fertility Fluctuates: The Role of Capital Mobility and Education Financing," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  12. Juan C. Conesa & Carlos Garriga, 2005. "Optimal Response to a Demographic Shock," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  13. Martín Gonzales-Eiras & Dirk Niepelt, 2007. "Population Ageing, Government Budgets, and Productivity Growth in Politico-Economic Equilibrium," Working Papers 07.05, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
    Other versions:
  14. Sita Nataraj Slavov, 2001. "Age Bias in Fiscal Policy: Why Does the Political Process Favor the Elderly?," Occidental Economics Working Papers 1, Occidental College, Department of Economics, revised Jan 2006. [Downloadable!]
    Other versions:
  15. 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)
  16. Juan Carlos Conesa & Carlos Garriga, 2007. "Optimal response to a transitory demographic shock in Social Security financing," Working Papers 2007-041, Federal Reserve Bank of St. Louis. [Downloadable!]
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