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On the optimal size of Social Security in the presence of a stock market

  • Hillebrand, Marten

The paper develops a stylized overlapping generations economy with random production and a stock market. The impact of a Social Security system on production, asset markets, and consumer welfare is analyzed. It is shown that any reduction in the contribution rate fosters capital accumulation and increases asset prices, wages, and production output. Different welfare criteria are applied to determine the optimal size of Social Security. It is shown that there exists a unique contribution rate which is long-run optimal, socially optimal, and time-consistent in the sense that no generation has an incentive to change it.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304406811001297
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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 48 (2012)
Issue (Month): 1 ()
Pages: 26-38

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Handle: RePEc:eee:mateco:v:48:y:2012:i:1:p:26-38
DOI: 10.1016/j.jmateco.2011.11.002
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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  1. Andrew B. Abel, 2002. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," NBER Working Papers 9210, National Bureau of Economic Research, Inc.
  2. Subir Chattopadhyay & Piero Gottardi, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Working Papers 99-12, Brown University, Department of Economics.
  3. Peled, Dan, 1984. "Stationary pareto optimality of stochastic asset equilibria with overlapping generations," Journal of Economic Theory, Elsevier, vol. 34(2), pages 396-403, December.
  4. Gabrielle Demange, 2001. "On optimality in intergenerational risk sharing," Post-Print halshs-00581414, HAL.
  5. Demange, G. & Laroque, G., 1996. "Social Security and Demographic Shocks," DELTA Working Papers 96-04, DELTA (Ecole normale supérieure).
  6. Hillebrand, Marten, 2011. "On the role of labor supply for the optimal size of Social Security," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1091-1105, July.
  7. Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-81, July.
  8. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
  9. W. Davis Dechert & Kenji Yamamoto, 1992. "Asset Valuation and Production Efficiency in an Overlapping-Generations Model with Production Shocks," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 389-405.
  10. Henning Bohn, 2004. "Intergenerational Risk Sharing and Fiscal Policy," 2004 Meeting Papers 22, Society for Economic Dynamics.
  11. Zilcha, Itzhak, 1991. "Characterizing efficiency in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 55(1), pages 1-16, October.
  12. Olovsson, Conny, 2010. "Quantifying the risk-sharing welfare gains of social security," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 364-375, April.
  13. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  14. Hauenschild, Nils, 2002. "Capital Accumulation in a Stochastic Overlapping Generations Model with Social Security," Journal of Economic Theory, Elsevier, vol. 106(1), pages 201-216, September.
  15. Demange, Gabrielle & Laroque, Guy, 2000. " Social Security, Optimality, and Equilibria in a Stochastic Overlapping Generations Economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 1-23.
  16. Magill, Michael & Quinzii, Martine, 2003. "Nonshiftable capital, affine price expectations and convergence to the Golden Rule," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 239-272, June.
  17. Wang Yong, 1993. "Stationary Equilibria in an Overlapping Generations Economy with Stochastic Production," Journal of Economic Theory, Elsevier, vol. 61(2), pages 423-435, December.
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