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Markovian Social Security in Unequal Societies

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Author Info

  • Zheng Song

    (Fudan University)

  • Kaiji Chen

    (University of Oslo)

Abstract

In this paper, we develop a dynamic politico-economic theory of social security to address two questions. First, how is social security sustained? Second, how does inequality affect the size of social security, and can the theoretical predictions be consistent with the observed puzzling relationships between inequality and the size of social security? As a stark framework, our model economy features the absence of altruism, commitment, reputation mechanism and electoral uncertainty. We characterize analytically a Markov perfect equilibrium and find that the joint between Markovian tax policy and tax distortion on private investment shapes an intertemporal policy rule linking taxes positively over time. The positive intertemporal tax linkage, by allowing current taxpayers to influence their own future social security benefit, provides the political support for social security. Moreover, we find that a larger wage inequality weakens the intertemporal tax linkage and, thus, reduces inter-generational redistributive benefit. This may lead to a smaller size of social security. Our theoretical predictions are in line with both time-series and cross-country correlations between inequality and social security.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 318.

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Date of creation: 2009
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Handle: RePEc:red:sed009:318

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References

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  1. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  2. Lorenzo Forni, 2005. "Social Security as Markov Equilibrium in OLG Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 178-194, January.
  3. Zheng Song, 2011. "The Dynamics of Inequality and Social Security in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 613-635, October.
  4. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Gerontocracy, Retirement, and Social Security," NBER Working Papers 7117, National Bureau of Economic Research, Inc.
  5. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 135-160, February.
  6. CREMER, Helmuth & DE DONDER, Philippe & MALDONADO, Dario & PESTIEAU, Pierre, . "Voting over type and generosity of a pension system when some individuals are myopic," CORE Discussion Papers RP -2051, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Song, Zheng, 2008. "Persistent Ideology and the Determination of Public Policies over Time," MPRA Paper 10364, University Library of Munich, Germany.
  8. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
  9. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2007. "Rotten parents and disciplined children: a politico-economic theory of public expenditure and debt," IEW - Working Papers 325, Institute for Empirical Research in Economics - University of Zurich.
  10. Roland Benabou, 2000. "Unequal Societies: Income Distribution and the Social Contract," American Economic Review, American Economic Association, vol. 90(1), pages 96-129, March.
  11. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Trends in U. S. Wage Inequality: Re-Assessing the Revisionists," Harvard Institute of Economic Research Working Papers 2095, Harvard - Institute of Economic Research.
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Cited by:
  1. Martin Gonzalez-Eiras, 2011. "Social security as Markov equilibrium in OLG models: a note," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 549-552, July.
  2. Ryo Arawatari & Tetsuo Ono, 2011. "Old-age Social Security vs. Forward Intergenerational Public Goods Provision," Discussion Papers in Economics and Business 11-26-Rev.2, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Aug 2013.
  3. Ryo Arawatari & Tetsuo Ono, 2011. "Old-age Social Security vs. Forward Intergenerational Public Goods Provision," Discussion Papers in Economics and Business 11-26, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  4. Ryo Arawatari & Tetsuo Ono, 2009. "The Political Economy of Social Security and Public Goods Provision in a Borrowing-constrained Economy," Discussion Papers in Economics and Business 09-38-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Aug 2010.
  5. Ryo Arawatari & Tetsuo Ono, 2008. "A Political Economy Model of Earnings Mobility and Redistribution Policy," Discussion Papers in Economics and Business 08-18-Rev.4, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Oct 2012.
  6. Tetsuo Ono, 2014. "Economic Growth and the Politics of Intergenerational Redistribution," Discussion Papers in Economics and Business 14-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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