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Markovian Social Security in Unequal Societies

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  • Kaiji Chen
  • Zheng Song

Abstract

In this paper, we develop a dynamic political-economic theory of social security. We analytically characterize a Markov perfect equilibrium and find that the interaction between Markovian tax policy and tax distortion on private investment in human capital shapes an intertemporal policy rule, linking taxes positively over time. By allowing current taxpayers to influence their own future social security benefits, the positive intertemporal tax linkage provides political support for social security. Moreover, this positive tax linkage leads to a negative correlation between wage inequality and the size of a nation's social security system, consistent with the empirical pattern observed across OECD countries.

Suggested Citation

  • Kaiji Chen & Zheng Song, 2014. "Markovian Social Security in Unequal Societies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(4), pages 982-1011, October.
  • Handle: RePEc:bla:scandj:v:116:y:2014:i:4:p:982-1011
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    File URL: http://hdl.handle.net/10.1111/sjoe.12072
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    Cited by:

    1. 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.
    2. Ryo Arawatari & Tetsuo Ono, 2015. "A Political Economy Model of Earnings Mobility and Redistribution Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(3), pages 346-382, June.
    3. Bishnu, Monisankar & Wang, Min, 2017. "The political intergenerational welfare state," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 93-110.
    4. Ryo Arawatari & Tetsuo Ono, 2014. "Old-age Social Security versus Forward Intergenerational Public Goods Provision," The Japanese Economic Review, Japanese Economic Association, vol. 65(3), pages 282-315, September.
    5. Ono, Tetsuo & Uchida, Yuki, 2016. "Pensions, education, and growth: A positive analysis," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 127-143.
    6. Tetsuo Ono, 2017. "Aging, Pensions, and Growth," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 73(2), pages 163-189, June.
    7. 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.
    8. 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, Osaka University, Graduate School of Economics.

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