The Optimal Design of Funded Pension Plans: Unbundling Financing and Investment
AbstractThe design of fully funded pension plans is affected by governance and incentive problems, as underlined by the experience of several countries. The analytic perspective of contract theory allows to detect the nature of such problems: pension-fund managers have strong incentives to manipulate market expectations about their capacity through wasteful activities (e.g. marketing). The design of funded pension plans has, thus, to trade-off efficiency losses and gains linked to high-powered incentives associated to the competition among fund managers. By means of a simple theoretical setting, this trade-off is shown to be driven by the integration of financing (contribution collection) and investment (asset allocation and management) activities. A separation of financing and investment allows to centralize the former and allocate collected money to a sector of competitive fund managers, via an auction mechanism. Under contract incompleteness, the quasi-competitive setting of funded pillar is proven to be Pareto-superior to the market of competitive pension funds (integrating financing and investment).
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Bibliographic InfoPaper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0003.
Length: 21 pages
Date of creation: Sep 2005
Date of revision:
Funded pensions; Governance; Auctions;
Find related papers by JEL classification:
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
- 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-2005-10-29 (All new papers)
- NEP-PBE-2005-10-29 (Public Economics)
- NEP-PUB-2005-10-29 (Public Finance)
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