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The Excess Burden of Government Indecision

Listed author(s):
  • Francisco Gomes

    (London Business School and CEPR)

  • Laurence Kotlikoff

    (Boston University and NBER)

  • Luis Viceira

    (Harvard Business School)

Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, they engender excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an age-25 agent would respond to learning at an early age whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as large as 0.6 percent of the agent’s economic resources. This is a significant distortion in of itself. It’s also significant when compared to other distortions measured in the literature.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp123.pdf
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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp123.

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Length: 42 pages
Date of creation: Jul 2006
Handle: RePEc:mrr:papers:wp123
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Web page: http://www.mrrc.isr.umich.edu/publications/papers/
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