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Temptation and social security in a dynastic framework

  • Kumru, Cagri S.
  • Tran, Chung

We investigate welfare and aggregate implications of a pay-as-you-go (PAYG) social security system in a dynastic framework in which individuals have self-control problems. The presence of self-control problems induces individuals to save less because of their urge for temptation towards current consumption. Individuals' efforts to balance between the short-term urge for temptation and the long-term commitment for consumption smoothing result in self-control costs. In this environment PAYG social security works as a self-control cost reducing device. In contrast, the presence of altruism induces individuals to save more. This in turn mitigates the adverse effects of self-control problems and PAYG social security on savings but magnifies the self-control costs. We find that in our environment the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporate altruism and self control issues separately. However, the level of mitigation is quite modest.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 7 ()
Pages: 1422-1445

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:7:p:1422-1445
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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