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Social Security as Markov Equilibrium in OLG Models

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  • Lorenzo Forni

    (Banca d'Italia)

Abstract

This paper studies the characteristics of intergenerational transfers in a standard overlapping generations model with short lived governments that care about the welfare of young generations only. A number of authors have shown that simple intergenerational games, in which in each period the current young generation plays as a dictator, are able to deliver political equilibria with social security even if the underlying competitive equilibrium is not dynamically inefficient. These authors have either derived pure steady state results or have relied on subgame perfectness. This paper extends these results deriving Markov subgame perfect equilibria (i.e. that depend only upon the period $t$ state variable, which is the stock of capital). Non-Markov subgame perfect equilibria assume agents know all the past history of the game; they can not predict when the social security system will emerge and whether or not it will eventually emerge; they prescribe that generations that never deviated may be punished. Markov equlibria, placing more restrictions on the structure of the game, are able to deliver solutions that do not suffer from these drawbacks. As the paper shows, however, Markov strategies may produce unstable dynamics. (Copyright: Elsevier)

Suggested Citation

  • Lorenzo Forni, 2005. "Social Security as Markov Equilibrium in OLG Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 178-194, January.
  • Handle: RePEc:red:issued:v:8:y:2005:i:1:p:178-194 DOI: 10.1016/j.red.2004.10.003
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    References listed on IDEAS

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    1. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 135-160, February.
    2. Grossman, Gene M & Helpman, Elhanan, 1998. "Intergenerational Redistribution with Short-Lived Governments," Economic Journal, Royal Economic Society, vol. 108(450), pages 1299-1329, September.
    3. Azariadis, Costas & Galasso, Vincenzo, 2002. "Fiscal Constitutions," Journal of Economic Theory, Elsevier, vol. 103(2), pages 255-281, April.
    4. Vincenzo Galasso, 1999. "The US Social Security System: What Does Political Sustainability Imply?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 698-730, July.
    5. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
    6. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
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    More about this item

    Keywords

    social security; overlapping generations models; Markov equilibria.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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