We model a pay-as-you-go (PAYG) pension system as a series of incomplete intergenerational contracts. Each generation pays a pension to its parents as the price for a premortal transferral of economic property rights. The terms of this intergenerational trade are fixed in a social contract, which due to its long-term nature is incomplete and likely to be renegotiated after some of the initial uncertainty has been resolved. In between, however, investments and education efforts have to be carried out which affect the value of the economic resources to be transferred between generations. This set-up creates a number of intergenerational externalities (including a canonical hold-up problem) which may contribute to the explanation of those problems that real-world PAYG public pension systems currently face.
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Find related papers by JEL classification: H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
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