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Pension Reform and Endogenous Borrowing Constraints

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  • Juan Rojas
  • Carlos Urrutia

Abstract

In this paper we study the quantitative properties of alternative social security regimes in a large overlapping generations model where households face uninsurable idiosyncratic income shocks. We study this issue in two model economies. The first is the standard one characterized by exogenous borrowing constraints. In the second one, because of the lack of commitment, these constraints are endogenously determined by the incentives to default on previous debts. We find that when the borrowing constraints are exogenous, changing the social security replacement rate from 44% to 0% increases the capital-output ratio and the saving rate by 44.3% in line with the predictions of quantitative OLG models without population growth. In contrast, when the borrowing constraints are endogenous, such policy change would increase the aggregate capital stock and the saving rate by 25%. The reason is that although without social security households save more for retirement and for precautionary reasons in order to insure against income risk, the magnitude of the latter is reduced since the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits

Suggested Citation

  • Juan Rojas & Carlos Urrutia, 2004. "Pension Reform and Endogenous Borrowing Constraints," 2004 Meeting Papers 413, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:413
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    More about this item

    Keywords

    social security; incomplete markets; endogenous borrowing constraints;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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