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The Optimal Design of Funded Pension Plans: Unbundling Financing and Investment

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  • Luciano Greco

    () (University of Padua)

Abstract

The design of fully funded pension plans is affected by governance and incentive problems, as underlined by the experience of several countries. The analytic perspective of contract theory allows to detect the nature of such problems: pension-fund managers have strong incentives to manipulate market expectations about their capacity through wasteful activities (e.g. marketing). The design of funded pension plans has, thus, to trade-off efficiency losses and gains linked to high-powered incentives associated to the competition among fund managers. By means of a simple theoretical setting, this trade-off is shown to be driven by the integration of financing (contribution collection) and investment (asset allocation and management) activities. A separation of financing and investment allows to centralize the former and allocate collected money to a sector of competitive fund managers, via an auction mechanism. Under contract incompleteness, the quasi-competitive setting of funded pillar is proven to be Pareto-superior to the market of competitive pension funds (integrating financing and investment).

Suggested Citation

  • Luciano Greco, 2005. "The Optimal Design of Funded Pension Plans: Unbundling Financing and Investment," "Marco Fanno" Working Papers 0003, Dipartimento di Scienze Economiche "Marco Fanno".
  • Handle: RePEc:pad:wpaper:0003
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    File URL: http://economia.unipd.it/sites/decon.unipd.it/files/20050003.pdf
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    Cited by:

    1. Anne Lavigne, 2006. "Gouvernance et investissement des fonds de pension privés aux Etats-Unis," Working Papers halshs-00081401, HAL.

    More about this item

    Keywords

    Funded pensions; Governance; Auctions;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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