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Transfers

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  • Xavier Sala-i-Martin

Abstract

In this paper I develop a positive theory of intergenerational transfers. I argue that transfers are a means to induce retirement. that is, to buy the elderly out of the labor force. The reason why societies choose to do such a thing is that aggregate output is higher if the elderly do not work. I model this idea through positive externalities in the average stock of human capital: because skills depreciate with age. one implication of these externalities is that the elderly have a negative effect on the productivity of the young. When the difference between the skill level of the young and that of the old is large enough, aggregate output in an economy where the elderly do not work is higher. Retirement in this case will be a good thing; pensions are just the means by which such retirement is induced. Unlike other theories of transfers. the theory in this paper is consistent with a number of regularities: transfers appear to be a luxury good that societies buy only after they reach a certain level of development and income: transfers are the only component of public spending that appear to be positively correlated with growth in a cross-section of countries; and transfers are linked to retirement and to the employment history of the worker. One key prediction of the model is that if the dependency ratio keeps rising, then the social security system will collapse, and that this will be the optimal thing to happen. Finally, a strict interpretation of the model would suggest that transfers to poor people, minimum wage laws. minimum working-age requirements and other types of public welfare serve the same purpose as old age social security; they keep workers possessing low human capital out of the labor force.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4186.

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Date of creation: Oct 1992
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Handle: RePEc:nbr:nberwo:4186

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References

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  1. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  2. Buiter, Willem H & Kletzer, Kenneth, 1991. "Persistent Differences in National Productivity Growth Rates with a Common Technology and Free Capital Mobility," CEPR Discussion Papers 542, C.E.P.R. Discussion Papers.
  3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  4. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  5. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  6. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  7. Casey B. Mulligan & Xavier Sala-i-Martin, 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," NBER Working Papers 3986, National Bureau of Economic Research, Inc.
  8. Martin Feldstein, 1985. "Should Social Security Be Means Tested?," NBER Working Papers 1775, National Bureau of Economic Research, Inc.
  9. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  10. Bartelsman, E.J. & Caballero, R.J. & Lyons, R.K., 1991. "Short and Long Run Externalities," Papers 91-18, Columbia - Graduate School of Business.
  11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  12. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Chapters, in: Issues in Pension Economics, pages 283-340 National Bureau of Economic Research, Inc.
  13. repec:fth:coluec:431 is not listed on IDEAS
  14. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  15. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
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Citations

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Cited by:
  1. F. Calidoni, 2005. "The effects of public transfers on productivity," Economics Department Working Papers 2005-EP01, Department of Economics, Parma University (Italy).
  2. Fidrmuc, J., 1999. "The Political Economy of Reforms in Central and Eastern Europe," Open Access publications from Tilburg University urn:nbn:nl:ui:12-80019, Tilburg University.
  3. Bénabou, Roland, 1996. "Unequal Societies," CEPR Discussion Papers 1419, C.E.P.R. Discussion Papers.
  4. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
  5. Fabrizio Carmignani, 2001. "Theory and Evidence on the Political Economy of Growth," Working Papers 33, University of Milano-Bicocca, Department of Economics, revised Jan 2001.
  6. Bénabou, Roland, 1996. "Inequality and Growth," CEPR Discussion Papers 1450, C.E.P.R. Discussion Papers.
  7. Fidrmuc, Jan, 1999. "Stochastic Shocks and Incentives for (Dis)Integration," CEPR Discussion Papers 2104, C.E.P.R. Discussion Papers.

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