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Social security and equity investment in an economy with financial intermediaries and costly monitoring

Listed author(s):
  • Giorgio Di Giorgio

This paper aims at extending the analysis of the efficiency of equilibria in an OLG framework with asymmetric information. I study the stationary states of an economy where consumers, firms and financial intermediaries are at work. The economy is affected by ex post moral hazard due to costly state verification; because of this inefficiency in the private financial system, a result different from the Samuelson-Diamond conclusions about the Pareto ranking of different equilibria is derived: the introduction of social security is proved to be Pareto improving in a market economy even in cases in which the economy is dynamically efficient. Moreover, I show that market outcomes can fail to achieve the Constrained Pareto Optimal allocation.

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Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 13.

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Length: 18
Date of creation: Apr 1996
Handle: RePEc:sap:wpaper:wp13
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  1. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 135-145.
  2. 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.
  3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  4. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
  5. Reichlin, Pietro & Siconolfi, Paolo, 1996. "The role of social security in an economy with asymmetric information and financial intermediaries," Journal of Public Economics, Elsevier, vol. 60(2), pages 153-175, May.
  6. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  7. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
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