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PAYG pensions, tax-cum-subsidy and optimality

Author

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  • Fanti, Luciano
  • Gori, Luca

Abstract

Using a simple OLG small open economy with endogenous fertility we show that the command optimum can be decentralised in a market setting using both a PAYG transfer from the young (old) to the old (young) and a tax-cum-subsidy (subsidy-cum-tax) policy, to redistribute within the working age generation. The latter instrument, in fact, reduces (increases) the opportunity cost of bearing children and, hence, stimulates (depresses) fertility. The policy implications are straightforward: when PAYG transfers exist and child rearing is time consuming, a tax-cum-subsidy (subsidy-cum-tax) policy can be used to internalise the externality of children, while also representing a Pareto improvement.

Suggested Citation

  • Fanti, Luciano & Gori, Luca, 2010. "PAYG pensions, tax-cum-subsidy and optimality," MPRA Paper 20219, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20219
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    File URL: https://mpra.ub.uni-muenchen.de/20219/1/MPRA_paper_20219.pdf
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    References listed on IDEAS

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    1. Deardorff, Alan V, 1976. "The Optimum Growth Rate for Population: Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 510-515, June.
    2. Eckstein, Zvi & Wolpin, Kenneth I., 1985. "Endogenous fertility and optimal population size," Journal of Public Economics, Elsevier, vol. 27(1), pages 93-106, June.
    3. Klaus Jaeger & Wolfgang Kuhle, 2009. "The optimum growth rate for population reconsidered," Journal of Population Economics, Springer;European Society for Population Economics, vol. 22(1), pages 23-41, January.
    4. Bas Groezen & Lex Meijdam, 2008. "Growing old and staying young: population policy in an ageing closed economy," Journal of Population Economics, Springer;European Society for Population Economics, vol. 21(3), pages 573-588, July.
    5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    6. Robert Fenge & Volker Meier, 2005. "Pensions and fertility incentives," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 28-48, February.
    7. Gahvari, Firouz, 1993. "Taxation and Government Expenditures in a Life-Cycle Growth Model," Public Finance = Finances publiques, , vol. 48(1), pages 33-56.
    8. van Groezen, Bas & Leers, Theo & Meijdam, Lex, 2003. "Social security and endogenous fertility: pensions and child allowances as siamese twins," Journal of Public Economics, Elsevier, vol. 87(2), pages 233-251, February.
    9. Edmund S. Phelps, 1968. "Population Increase," Canadian Journal of Economics, Canadian Economics Association, vol. 1(3), pages 497-518, August.
    10. Luca Gori & Luciano Fanti, 2007. "Welfare and Fertility in a Neoclassical Olg Growth Model: The Effects of Intra-Generational Tax Policies," STUDI ECONOMICI, FrancoAngeli Editore, vol. 2007(93), pages 53-69.
    11. Samuelson, Paul A, 1975. "The Optimum Growth Rate for Population," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 531-538, October.
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    Cited by:

    1. Luciano Fanti & Luca Gori, 2014. "Endogenous fertility, endogenous lifetime and economic growth: the role of child policies," Journal of Population Economics, Springer;European Society for Population Economics, vol. 27(2), pages 529-564, April.
    2. Stauvermann, Peter J. & Ky, Sereyvath & Nam, Gi-Yu, 2013. "The Costs of Increasing the Fertility Rate in an Endogenous Growth Model," MPRA Paper 46381, University Library of Munich, Germany.

    More about this item

    Keywords

    Overlapping generations; PAYG Pensions; Small open economy; Tax-cum-subsidy;

    JEL classification:

    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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