Coping with Rational Prodigals: A Theory of Social Security and Savings Subsidies
The rational prodigality argument, which often serves to justify social security, is considered in a second-best tax framework with endogenous labour supply. Rational prodigality renders the familiar policies time-inconsistent. I analyse time-consistent policies and show that a wage tax suffices to rule out prodigality as a rational strategy. However, by using savings subsidies the solution can be improved upon. The subsidies are shown to be decreasing in income. A social security system with increasing contributions is not needed in either case. Copyright (c) The London School of Economics and Political Science 2006.
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Volume (Year): 73 (2006)
Issue (Month): 289 (02)
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