Pension reform, assets returns and wealth distribution
AbstractIn OLG framework, it is generally admitted that PAYG pension system generates a lower capital accumulation, a higher level of interest rate but is more inequality reducing. By taking into account different assets returns and unequal access to them, we find that the PAYG pension system generates lower level of interest rate and increases wealth inequality. By using Matsuyama's (2000) technology that generates dynamic endogenous inequality, we represent the bequest and saving behaviour of the agents in an OLG model. This allows us to characterize the optimal investment choice of agents across two assets as a function of their initial endowment and a unique inheritance threshold depending on the equilibrium interest rate. This inheritance threshold divides the population into two categories : the rich-borrowers and the poor-lenders. In this context, we find that, the effect of increasing the contribution rate to the pension system is to increase inequality. Indeed, it increases the number of constrained agents and decreases the equilibrium interest rate. More the initial wealth distribution is egalitarian, more these effects are amplified. As the interest rate is the lending rate of poor-constrained agents, they lose from the reform while unconstrained-rich agents benefit from the reform since the decrease of the interest rate increases the net return of their investment. Unconstrained-rich agents benefit from the reform at the expense of constrained-poor agents.
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Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number v04033.
Length: 19 pages
Date of creation: Mar 2004
Date of revision:
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Pension reform; inequality; incomplete markets; savings; wealth distribution.;
Find related papers by JEL classification:
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-12 (All new papers)
- NEP-PBE-2004-12-12 (Public Economics)
- NEP-PUB-2004-12-12 (Public Finance)
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