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Temptation and Social Security in a Dynastic Framework

  • Cagri Seda Kumru

    ()

    (School of Economics, University of New South Wales)

  • Chung Tran

    ()

    (School of Economics, University of New South Wales)

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.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2009-09.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2009-09.

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Length: 42 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:swe:wpaper:2009-09
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