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Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints

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Author Info

  • Juan Rojas

    (Universidad Carlos III de Madrid)

  • Carlos Urrutia

    (Centro de Investigacion Economica, ITAM)

Abstract

We study the aggregate effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the borrowing constraint in the unique asset is endogenously determined by the agents' incentives to default on previous debts. We find that a model with exogenous borrowing constraints overestimates the positive e¤ect of reforming social security on the capital stock and the saving rate, compared to our model with endogenous borrowing limit. The reason is that, in the latter, the size of precautionary savings is smaller because after the reform the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits. Adding retirement accounts to the basic model does not change these conclusions, although the quantitative importance of endogenizing borrowing constraints is reduced.

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File URL: http://128.118.178.162/eps/mac/papers/0410/0410010.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0410010.

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Length: 31 pages
Date of creation: 27 Oct 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0410010

Note: Type of Document - pdf; pages: 31
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Web page: http://128.118.178.162

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Keywords: Social Security; Borrowing Constraints; Incomplete Marrkets; Income Risk;

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References

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Citations

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Cited by:
  1. Kumru, Çagri S. & Thanopoulos, Athanasios C., 2008. "Social security and self control preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 757-778, March.
  2. Cagri S. Kumru & Athanasios C. Thanopoulos, 2010. "Social Security Reform with Self-Control Preferences," Discussion Papers 2010-11, School of Economics, The University of New South Wales.
  3. Ferreiray, Pedro Cavalcanti & Santos, Marcelo Rodrigues, 2012. "The Effect of Social Security, Health, Demography and Technology on Retirement," Insper Working Papers wpe_274, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  4. Pedro Cavalcanti Ferreira & Marcelo Rodrigues dos Santos, 2013. "The Effect of Social Security, Health, Demography and Technology on Retirement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 350-370, April.
  5. Tetsuo Ono, 2007. "Unemployment dynamics in an OLG economy with public pensions," Economic Theory, Springer, vol. 33(3), pages 549-577, December.
  6. Cagri Seda Kumru & Athanasios C. Thanopoulos, 2009. "Social Security Reform and Temptation," CESifo Working Paper Series 2778, CESifo Group Munich.
  7. Hans Fehr & Christian Habermann & Fabian Kindermann, 2006. "Social Security with Rational and Hyperbolic Consumers," Working Papers 010, Bavarian Graduate Program in Economics (BGPE).
  8. Fang Yang, 2012. "Social Security Reform with Impure Intergenerational Altruism," Discussion Papers 12-01, University at Albany, SUNY, Department of Economics.

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