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Hunting the Unobservables for Optimal Social Security: A General Equilibrium Approach

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Abstract

We study the optimal size of a pay-as-you-go social security program for an economy composed of both permanent-income and hand-to-mouth consumers. While previous work on this topic is framed within a two-period partial equilibrium setup, we study this issue in a life-cycle general equilibrium model. Because this type of welfare analysis depends critically on unobservable prefer- ence parameters, we methodically consider all parameterizations of the unobservables that are both feasible and reasonable— all parameterizations that can mimic key features of macro data (feasible) while still being consistent with micro evidence and convention (reasonable). The model predicts that the optimal tax rate is between 6 percent and 15 percent of wage income.

Suggested Citation

  • Frank N. Caliendo & Emin Gahramanov, 2008. "Hunting the Unobservables for Optimal Social Security: A General Equilibrium Approach," Economics Series 2008_10, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  • Handle: RePEc:dkn:econwp:eco_2008_10
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    File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2008_10eco.pdf
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    References listed on IDEAS

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    6. Rubinstein, Ariel & Safra, Zvi & Thomson, William, 1992. "On the Interpretation of the Nash Bargaining Solution and Its Extension to Non-expected Utility Preferences," Econometrica, Econometric Society, vol. 60(5), pages 1171-1186, September.
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    11. Ken Binmore, 1998. "Game Theory and the Social Contract - Vol. 2: Just Playing," MIT Press Books, The MIT Press, edition 1, volume 2, number 0262024446, January.
    12. Miyagawa, Eiichi, 2002. "Subgame-perfect implementation of bargaining solutions," Games and Economic Behavior, Elsevier, vol. 41(2), pages 292-308, November.
    13. Yusuke Samejima, 2005. "A Note on Implementation of Bargaining Solutions," Theory and Decision, Springer, vol. 59(3), pages 175-191, November.
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    Citations

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    Cited by:

    1. Frank Caliendo & T. Findley, 2013. "Limited computational ability and social security," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 414-433, June.
    2. Frank N. Caliendo, 2009. "Is Social Security behind the Collapse of Personal Saving?," CESifo Working Paper Series 2746, CESifo Group Munich.
    3. Frank Caliendo & Emin Gahramanov, 2013. "Myopia and pensions in general equilibrium," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(3), pages 375-401, July.

    More about this item

    Keywords

    Optimal Social Security; Unobservable Preference Parameters; General Equilibrium Calibration; Permanent Income; Hand to Mouth;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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