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Temptation and Social Security in a Dynastic Framework

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  • Cagri Seda Kumru

    () (School of Economics, University of New South Wales)

  • Chung Tran

    () (School of Economics, University of New South Wales)

Abstract

We investigate welfare and aggregate implications of a pay as you go (PAYG) social security system in a dynastic framework in which agents have self-control problems. The presence of these two additional factors at the same time affects individuals’ intertemporal decision problems in two opposite directions. That is, on the one hand individuals prefer to save more because of their altruistic concerns, on the other hand, they prefer to save less because of their urge for temptation towards current consumption. Individuals’ efforts to balance between the long-term commitment (consumption smoothing and altruism) and the short-term urge for temptation result in self-control costs. In this environment the existence of social security system provides not only consumption smoothing and risk sharing mechanisms but also a channel that reduces the severity of temptation. We find that the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporates altruism and self control issues separately.

Suggested Citation

  • Cagri Seda Kumru & Chung Tran, 2009. "Temptation and Social Security in a Dynastic Framework," Discussion Papers 2009-09, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2009-09
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2009-09.pdf
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    Cited by:

    1. Carlos Bethencourt & Lars Kunze, 2017. "Temptation and the efficient taxation of education and labor," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 986-1000, November.
    2. repec:spr:inrvec:v:65:y:2018:i:1:d:10.1007_s12232-017-0284-5 is not listed on IDEAS

    More about this item

    Keywords

    Temptation; Self-control preferences; Altruism; Social security; Dynamic general equilibrium; Overlapping generations; Welfare;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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