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Pareto improving social security reform when financial markets are incomplete!?

  • Krueger, Dirk
  • Kubler, Felix

This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically effcient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.

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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2005/12.

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Date of creation: 2005
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Handle: RePEc:zbw:cfswop:200512
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