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Financial Development and the Demand for Pay-As-You-Go Social Security

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Author Info
Pinotti, Paolo

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Abstract

Financial markets and pay-as-you-go social security are two alternative ways to provide for retirement. Voting over the size of social security programs could therefore be partly determined by financial development. In this paper I allow for this possibility in an OLG model where financial development may be hindered by frictions. The main implication of the model is that greater financial frictions lead to lower financial investment and higher social security transfers in the political-economy equilibrium. To explore this model implication empirically, I use countries’ legal origin as a proxy of frictions that may hold back financial development. The empirical analysis yields a strong and robust negative effect of financial development on the size of social security transfers.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7599.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:7599

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Related research
Keywords: social security financial development legal origins.

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Find related papers by JEL classification:
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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  15. Casey B. Mulligan & Ricard Gil & Xavier Sala-i-Martin, 2004. "Do Democracies Have Different Public Policies than Nondemocracies?," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 51-74, Winter. [Downloadable!] (restricted)
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  17. Eduardo Walker & Fernando Lefort, 2002. "Pension Reform And Capital Markets: Are There Any (Hard) Links?," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 5(2), pages 77-149. [Downloadable!]
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  19. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
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