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The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks

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  • Andrew B. Abel

Abstract

With fixed costs of participating in the stock market, consumers with high income will participate in the stock market, but consumers with lower income will not participate. If a fully-funded defined-contribution social security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita, consumers who save but do not participate in the stock market will increase their consumption, thereby reducing saving and capital accumulation. Calibration of a general equilibrium model indicates that this policy could reduce the aggregate capital stock substantially, by about 50 cents per capita.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7739.

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Date of creation: Jun 2000
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Publication status: published as Andrew B. Abel, 2001. "The Effects of Investing Social Security Funds in the Stock Market When Fixed Cobsts Prevent Some Households from Holding Stocks," American Economic Review, American Economic Association, vol. 91(1), pages 128-148, March.
Handle: RePEc:nbr:nberwo:7739

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  1. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, Elsevier, vol. 29(1), pages 97-112, March.
  2. Cecchetti, Stephen G. & Lam, Pok-sang & Mark, Nelson C., 1993. "The equity premium and the risk-free rate : Matching the moments," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(1), pages 21-45, February.
  3. Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1.
    • Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1.
  4. Andrew B. Abel, . "The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 3-99, Wharton School Rodney L. White Center for Financial Research.
  5. Peter Diamond & Jean Geanakoplos, 1999. "Social Security Investment in Equities I: Linear Case," NBER Working Papers 7103, National Bureau of Economic Research, Inc.
  6. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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