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The Excess Burden of Government Indecision

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  • Francisco Gomes

    (London Business School and CEPR)

  • Laurence Kotlikoff

    (Boston University and NBER)

  • Luis Viceira

    (Harvard Business School)

Abstract

Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, they engender excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an age-25 agent would respond to learning at an early age whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as large as 0.6 percent of the agent’s economic resources. This is a significant distortion in of itself. It’s also significant when compared to other distortions measured in the literature.

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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp123.

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Length: 42 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:mrr:papers:wp123

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Citations

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Cited by:
  1. Laurence Kotlikoff & Ben Marx & Pietro Rizza, 2006. "Americans' Dependency on Social Security," Working Papers wp126, University of Michigan, Michigan Retirement Research Center.
  2. Pástor, Luboš & Veronesi, Pietro, 2011. "Political Uncertainty and Risk Premia," CEPR Discussion Papers 8601, C.E.P.R. Discussion Papers.
  3. Luigi Siciliani, 2007. "Paying for performance with altruistic or motivated providers," Discussion Papers 07/33, Department of Economics, University of York.
  4. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, 08.
  5. repec:cge:warwcg:46 is not listed on IDEAS
  6. Alex Armstrong & Nick Draper & André Nibbelink & Ed Westerhout, 2007. "Fiscal prefunding in response to demographic uncertainty," CPB Discussion Paper 85, CPB Netherlands Bureau for Economic Policy Analysis.

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