an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

temptation and social security in a dynastic framework abstract we investigate welfare and aggregate implications of a pay as you go payg social security system in a dynastic framework in which individuals have self control problems the presence of self control problems induces individuals to save less because of their urge for temptation towards current consumption individuals efforts to balance between the short term urge for temptation and the long term commitment for consumption smoothing result in self control costs in this environment payg social security works as a self control cost reducing device in contrast the presence of altruism induces individuals to save more this in turn mitigates the adverse effects of self control problems and payg social security on savings but magnifies the self control costs we find that in our environment the adverse welfare effects of a payg system are further mitigated relative to the environments that incorporate altruism and self control issues separately however the level of mitigation is quite modest

time inconsistent preferences and social security revisited in continuous time abstract imrohoroglu et al 2003 prove that it is impossible in a three period partial equilibrium model for social security to improve the welfare of a naive quasi hyperbolic agent if the program has a negative net present value this paper first generalizes their impossibility theorem to a continuous time setting and then proves analytically that no discount function exists that can rationalize a social security program with a negative net present value

the optimal level of social security benefits the optimal level of social security benefits depends on balancing the protection that these benefits offer to those who lack the foresight to provide for their own old age against the welfare costs of distorting economic behavior the primary such cost is the distortion in private saving the present paper derives the level of social security benefits that is optimal in three basic cases in the first section the paper derives the optimal level of benefits for an economy in which all individuals do not anticipate retirement at all and therefore do no saving the second and third sections then derive optimal benefits for two different definitions of incomplete myopia

a life cycle consumption model with liquidity constraints theory and empirical results a structural consumption model incorporating endogenous liquidity constraints is fit to a cross section of 798 u s families liquidity constrained families are estimated to constitute 19 4 percent of the population sampled a group that accounts for 16 7 percent of consumption in the population sampled in sample simulations of the model suggest that a temporary tax has three to four times more impact on aggregate consumption than it would if liquidity constraints were not in effect copyright 1987 by the econometric society

labor supply and the optimality of social security abstract traditional economic theory predicts that an unfunded public pension system can be justified on the basis of its ability to provide intergenerational transfers and also for its ability to provide partial insurance against mortality and labor income risks in this paper i demonstrate that the quantitative importance of these traditional roles depends on how the pension system distorts households labor supply decisions using a general equilibrium life cycle consumption model calibrated to the u s economy i show that these distortions can be large enough to erase much of the traditional welfare gains from social security i also find that this fact is robust within the range of labor supply elasticities usually encountered in the macroeconomic literature

the labor market four years into the crisis assessing structural explanations four years after the beginning of the great recession the labor market remains historically weak many observers have concluded that structural impediments to recovery bear some of the blame the author reviews such structural explanations but after analyzing u s data on unemployment and productivity he finds there is little evidence supporting these hypotheses he finds that the bulk of the evidence is more consistent with the hypothesis that continued poor performance is primarily attributable to shortfalls in the aggregate demand for labor

time inconsistent preferences and social security in this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time inconsistent preferences who face mortality risk individual income risk and borrowing constraints we find that unfunded social security lowers the capital stock output and consumption for consumers with time consistent or time inconsistent preferences however it may raise or lower welfare depending on the strength of time inconsistency

myopia redistribution and pensions this paper reviews a number of recent contributions that study pension design with myopic individuals its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity this double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations which is at the heart of most of the results that are presented the main part of the paper is devoted to the issue of pension design when myopic individual do not save enough for their retirement because their myopic self with a high discount rate emerges when labor supply and savings decisions are made some extensions and variations are considered in the second part in particular we deal with situations where labor disutility or preferences for consumption are subject to habit formation and where sin goods have a detrimental effect on second period health myopic individuals tend to underestimate the effects of both habit formation and sinful consumption which complicates public policy

long run competition in capacity short run competition in price and the cournot model in this article we investigate the nature of equilibrium in markets in which firms choose the scale of operation before they make pricing decisions we analyze a duopoly model in which firms choose their capacities before engaging in bertrand like price competition we demonstrate that the cournot outcome is unlikely to emerge in such markets and that the equilibrium tends to be more competitive than the cournot model would predict in addition our results indicate a tendency toward asymmetric firm sizes and price dispersion that results from the mixed strategies firms use in equilibrium

differential mortality and the progressivity of social security abstract there is a well established negative correlation between earnings and mortality risk using a calibrated general equilibrium macroeconomic model this paper examines how this correlation interacts with the welfare implications of social security s benefit earnings rule my primary findings suggest that the welfare ranking of alternative benefit earnings rules is somewhat sensitive to differential mortality due to their relatively high mortality risk households with unfavorable earnings histories heavily discount the expected utility from old age consumption and therefore do not put much weight on better work retirement consumption smoothing because of this reason social security s benefit earnings rule warrants less redistribution in the presence of differential mortality compared to when mortality risk is uncorrelated to earnings i find that this result continues to hold when household level labor supply distortions are ignored and also when an alternative maximin welfare criterion is considered but not when accidental bequests from the deceased are redistributed to the survivors

being a leader or a follower this paper deals with the analysis of conflicts in duopoly situations in particular with the distribution of roles in the von stackelberg framework which firm will be the leader which firm the follower under what circumstances will firms find a mutually advantageous distribution of roles will they fight for leadership or followship in von stackelberg s analysis of duopoly either firms do not choose their respective roles or they fight for leadership this situation is due to the particular strategy space namely the quantity to produce of an homogeneous good we extend here the strategy space to price quantity pairs we show that if costs are identical or similar then both firms will prefer the role of follower if there is a significant cost differential between the firms then the non cooperative equilibrium can only be of two types either the less efficient firm will act as the leader selling a limited quantity at a low price and the more efficient firm as the follower selling to the residual demand at a higher price or the more efficient firm acting as leader will drive the less efficient firm out of the market by adopting a limit pricing strategy but in so doing that firm makes less profits than if it acts as follower we suggest that it is not unreasonable to expect that firms in a duopoly framework will tend to coordinate on their mutually advantageous role distribution even if they compete in a non cooperative strategic way in terms of both prices and quantities

a quantitative analysis of capital income taxation this paper studies the quantitative impact of eliminating capital income taxation on capital accumulation and steady state welfare in a general equilibrium model with overlapping generations of sixty five period lived individuals who face idiosyncratic earnings risk borrowing constraints and life span uncertainty under a wide range of parameter configurations the capital income tax rate that maximizes steady state welfare is positive even though eliminating it completely would raise the steady state capital stock toward the golden rule this is because the tax burden is shifted toward the younger and liquidity constrained years reducing the individuals ability to self insure copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the cyclical and secular behaviour of the labour input comparing efficiency units and hours worked summary a monthly labour input series designed to correct for the fact that all hours worked are not of the same quality is constructed and its properties compared with unadjusted hours worked this efficiency units series is constructed from bls data on hours worked and earnings by age and sex the cyclical fluctuations displayed by the efficiency units series are smaller on average than those displayed by hours worked although the difference is not large however the secular behaviour of the series is quite different hours worked per capita displays a significant positive trend while efficiency units per capita does not

consumption during retirement the missing link in the life cycle this study presents the first evidence on the relation of consumption to lifetime wealth based on data from the 1973 and 1975 retirement history survey that have been linked to social security earnings records nearly 500 white married fully retired couples ages 62 69 form the basis of the analysis on average their consumption early in retirement exceeds by 14 percent the income that their financial pension and social security wealth can generate this implies that their saving both private and through social security is insufficient to sustain consumption throughout the rest of their lives additional evidence based on changes in spending between 1973 and 1975 shows that these households respond by reducing their real consumption at a rate sufficient to generate positive changes in net financial worth within a few years after retirement these two pieces of evidence can be rationalized by a rate of time preference much higher than the interest rate coupled with either a bequest motive or uncertainty about the length of life they also imply that even when combined with private pensions and savings social security in the united states today does not enable most recipients to maintain their living standard at the levels they enjoyed before they retired this abstract was borrowed from another version of this item

the existence of equilibrium in discontinuous economic games ii applications in part i of this study we established two existence theorems for mixed strategy equilibrium in games with discontinuous payoff functions see theorems 4 4 and 5 5 in dasgupta and maskin 1986 hereafter d m 1986 in this second part we use the second of these two theorems to prove the existence of mixed strategy equilibrium in some wellknown discontinuous economic games that fail to have pure strategy equilibria the models we analyse are the bertrand edgeworth example of price setting duopolists with capacity constraints see section 2 2 price competition among firms producing differentiated products hotelling 1929 and d aspremont gabszewicz and thisse 1979 see section 2 3 spatial competition eaton and lipsey 1975 and shaked 1975 see section 3 and models of market dependent information rothschild and stiglitz 1976 and wilson 1977 section 4 the paper concludes section 5 with a classification of these models

advance production in posted offer markets abstract data from market sessions in which production is to demand are compared with data from sessions requiring that output decisions be made and production costs incurred prior to the start of trading in each period no inventory carry over is permitted differences in aggregate output measures such as average contact price sales and market efficiency tend to disappear as traders gain experience in an unchanging environment however the addtional risk introduced by the sunk cost aspect of advance production appears to offset any advantage regarding sellers share of the surplus conferred by the power to post prices

the budgetary and welfare effects of tax deferred retirement saving accounts abstract the present paper analyzes the budgetary macroeconomic and welfare effects of tax deferred retirement saving accounts similar to u s 401 k plans in a dynamic general equilibrium overlapping generations economy with heterogeneous households because of the initial deferral of tax payments the short run budgetary cost of tax deferred accounts is significantly higher than the long run cost therefore the budget neutral introduction of tax deferred accounts would make current and near future households worse off although it would increase national wealth and total output in the long run if the government spread the short run cost to future households by increasing debt the policy change could make all age cohorts on average as well off as the economy without tax deferred accounts due to increased government debt and debt service costs however national wealth and total output would decrease in the long run thus introducing tax deferred accounts would not increase national wealth and improve social welfare at the same time this is partly because the policy change is regressive and reduces the risk sharing effect of the current income tax system

social security and unsecured debt abstract in this paper we use a calibrated life cycle model to explore quantitatively ways of reducing the burden of social security in a world populated by both optimizing and rule of thumb consumers social security contributions force young households with upward sloping income profiles to save a sizeable portion of their income for retirement when their optimal consumption plan would likely have them either saving little or borrowing we first use household data to document that young households have accumulated social security contributions that are large relative to debt holdings then using a calibrated life cycle model we show that both allowing households to use social security wealth to pay off their debt and exempting young households from social security contributions but in both cases requiring higher contributions later mitigate many of the inefficiencies of social security from the perspective of life cycle financial planning specifically in our preferred experiment which exempts households whose heads are under 30 from making social security contributions we find that certainty equivalent consumption increases by 3 4 for optimizing households and by 3 3 for rule of thumb households

intergenerational risk sharing abstract in this paper we examine government debt and tax transfer policies that can be improve the allocation of risk between generations markets cannot allocate risk efficiently between two generations whenever the two generations are not both alive prior to the occurence of a stochastic event this implies that government policies transferring risk between generations have the potential to create first order welfare improvements our model provides a non keynesian justification for the debt finance of wars and recessions as well as an added rationale for social security type tax transfer schemes which aid unlucky generations e g the depression generation at the expense of luckier generations

should we refinance unfunded social security within a continuous time overlapping generations model featuring endogenous intensive margin of the labour supply and retirement decision we analyse the issue of passing the burden of payroll revenues onto consumption or capital we find that large long run welfare gains occur when pension benefits are refinanced by consumption taxes however the transition to the new steady state is very painful for a large fraction of existing cohorts on the other hand the capital base is too small to sustain pension benefits but could be made larger if capital taxes are raised yet that would entail significant welfare losses

dynamic consistency and regret abstract individuals often report that they regret not having saved more for retirement this fact raises concerns about the financial security of retirees and about the adequacy of traditional economic models in making predictions that are consistent with regret about having saved too little for retirement we provide an overview of four discounted utility models and examine their implications for the optimal level of retirement savings all of these models exhibit dynamically consistent decision making and some also feature backward discounting in order to generate regret about past saving decisions in our preferred parameterization with both forward and backward discounting a 66 year old at retirement will consider the optimal level of retirement savings to be almost twice as large as what was actually saved even though actual saving decisions are dynamically consistent across the entire life cycle compared to a model setting with fixed retirement adding choice over retirement timing compounds the regret that individuals experience about past saving decisions

assessing bankruptcy reform in a model with temptation and equilibrium default abstract a life cycle model with equilibrium default in which agents with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform the calibrated model indicates that the 2005 reform reduces bankruptcies as seen in the data and improves welfare as lower default premia allows better consumption smoothing a counterfactual reform of changing income garnishment rate is also investigated interesting contrasting welfare effects between two types of agents emerge agents with temptation prefer a lower garnishment rate as tighter borrowing constraint prevents them from over borrowing while those without prefer better consumption smoothing enabled by a higher garnishment rate

tax deferred saving accounts heterogeneity and policy reforms abstract tax deferred saving accounts tda are systematically used in many countries in the united states households access to tda exhibits substantial heterogeneity 401 k has a higher contribution limit than ira but only 50 of workers are eligibility for it i developed an overlapping generations model that captures the tax benefits of tda and the heterogeneity in 401 k eligibility to investigate the quantitative impacts of tda on the aggregate economy and their implications on policy reforms experiment results show that ira already provides sufficient tax benefits for most households the effects of providing universal 401 k are relatively insignificant because households who can benefit from 401 k already have access to it on the other hand raising the tda contribution limit allows high income households to increase their use of tda and results in stronger effects on the economy when households use of tda is considered the u s income tax system is less distortionary and the welfare gain from a consumption tax reform is reduced by more than half

rationing rules and bertrand edgeworth equilibria in large markets abstract in a market with concave downward sloping demand and symmetric firms which compete in prices with constant marginal costs and capacity limits it is shown that the supports of the symmetric mixed strategy nash equilibria converge to the unique competitive price provided that unsatisfied demand is allocated according to the surplus maximizing rationing rule

social security and self control preferences abstract we analyze the welfare effects of an unfunded social security system we do so using an overlapping generations economy wherein agents have self control preferences face mortality risk individual income risk and borrowing constraints given our specification of preferences unfunded social security helps reduce the agents temptation to consume in every period consequently the welfare costs it otherwise entails are substantially mitigated while both social security and self control when considered separately reduce welfare their combination renders this effect considerably less severe moreover if the cost of resisting temptation is very high the introduction of social security might even improve welfare

optimal life cycle capital taxation under self control problems we study optimal taxation of savings in an economy where agents face self control problems and we allow the severity of self control to change over the life cycle we focus on quasi hyperbolic discounting with constant elasticity of inter temporal substitution utility functions and linear markov equilibria we derive explicit formulas for optimal taxes that implement the efficient commitment allocation we show analytically that if agents ability to self control increases concavely with age then savings should be subsidised and the subsidy should decrease with age we also study the quantitative effects of age dependent self control problems and find that the optimal subsidies in our environment are much larger than those implied by models with constant self control finally we compare our optimal subsidies with those implied by the 401 k plan although the subsidy levels in the two cases are of comparable magnitudes the 401 k plan implies an increasing pattern of subsidies while the optimal subsidies decrease over the life cycle

bertrand edgeworth duopoly with proportional residual demand a complete characterization is given for the prices charged by bertrand edgeworth duopolists with capacity constraints in general for the game in which firms strategy spaces consist of price offers nash equilibrium involves nondegenerate mixed strategi es equilibria never extend below the highest competitive price with tw o firms the bertrand edgeworth model displays a bias for the highest of several market clearing prices moreover these strategies never stop short of the lowest monopoly price if firms are of unequal siz e the larger firm assigns positive probability to a monopoly price possibly even to several monopoly prices copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

procrastination and obedience in this lecture i shall focus on situations involving repeated decisions with time inconsistent behavior although each choice may be close to maximizing and therefore result in only small losses the cumulative effect of a series of repeated errors may be quite large thus in my examples decision makers are quite close to the intelligent well informed individuals usually assumed in economic analysis but cumulatively they make seriously wrong decisions that do not occur in standard textbook economics this lecture discusses and illustrates several pathological modes of individual and group behavior procrastination in decision making undue obedience to authority membership of seemingly normal individuals in deviant cult groups and escalation of commitment to courses of action that are clearly unwise in each case individuals choose a series of current actions without fully appreciating how those actions will affect future perceptions and behavior the standard assumption of rational forwardlooking utility maximizing is violated the nonindependence of errors in decision making in the series of decisions can be explained with the concept from cognitive psychology of undue salience or vividness for example present benefits and costs may have undue salience relative to future costs

price competition in a capacity constrained duopoly abstract this paper characterizes the set of nash equilibria in a model of price setting duopoly in which each firm has limited capacity and demand is continuous and decreasing in general there is a unique equilibrium so that comparative static exercises are meaningful the properties of the equilibrium conform with a number of stylized facts the equilibrium prices are lower the smaller is demand relative to capacity when demand is in an intermediate range the firms use mixed strategies they randomly hold sales if capacities are chosen simultaneously before prices the set of equilibrium capacities coincides with the set of cournot quantities

family specific investments and divorce with dynamically inconsistent households marital contracts and policy abstract this paper bridges two distinct areas of inquiry the economic theory of the family and behavioral research on time inconsistent preferences motivated by anecdotal and survey evidence suggesting that present bias plays a role in intra household decision making we propose a model in which hyperbolic discounting couples engage in home production activities thereby accumulating family specific capital over time at any given point in time the gains to continued marriage depend on the accumulated stock of this capital and a temporary random shock to match quality couples whose match quality deteriorates may choose to divorce and this is more likely to happen if past investments in family specific capital have been low we obtain three main sets of results first present biased preferences induce couples to underinvest in family specific capital and to overdivorce second sophisticated couples but not naive ones may choose to enter marriage on terms which make divorce more costly to obtain third the inefficiencies in the behavior of time inconsistent couples can be completely undone by means of earnings and divorce taxes that vary over the marital life cycle

advance production inventories and market power an experimental investigation i introduction bertrand edgeworth games are an important part of any industrial organization economist s toolkit the unilateral market power created by capacity constraints represents one of economists primary methods for modeling supra competitive prices as a static equilibrium outcome in a price setting game 1 the standard bertrand edgeworth model however rather restrictively assumes that production is to demand and that goods are immediately perishable in the broad swath of modern economies that includes the production and sale of physical products these assumptions are often not even approximately satisfied goods are routinely produced prior to being offered for sale at retail establishments similarly while the effective shelf life of many products is quite short relatively few products perish immediately and many have effective shelf lives that extend throughout a sales season if not longer this paper reports a laboratory experiment conducted to assess the effects of having sellers make production decisions in advance rather than to demand and allowing sellers to carry unsold units across periods on market power in a bertrand edgeworth pricing game by way of preview we find that both advance production and an inventory option prominently affect market outcomes advance production reduces profits relative to a baseline condition while an inventory option reduces both prices and profits these results are important as they suggest that deviations from the standard oligopoly structures that routinely arise in natural contexts may fundamentally affect market performance we organize the paper as follows following a brief review of the pertinent literature in section ii we outline equilibrium predictions for baseline advance production and inventory treatments in section iii section iv describes the experimental design and procedures and section v presents the experimental results the paper concludes with a short section vi ii background a theoretical literature economists have long recognized the restrictiveness of the standard price setting oligopoly models shubik 1955 for example argues that when evaluating price setting duopolies economists should consider price quantity games where sellers simultaneously post prices and quantities in addition to games where price is the only decision variable 2 levitan and shubik 1978 compute the mixed strategy equilibrium for a duopoly given advance production and unlimited capacities more recently tasnadi 2004 analyzes the case of advance production for capacity constrained duopolists pertinent to the present investigation tasnadi shows that under very general conditions advance production raises prices but leaves seller profits unaffected the only theoretical work that analyzes the links between product durability and market prices of which we are aware is a stream of literature following coase 1972 regarding the effects of product durability on monopoly power specifically given sufficiently patient consumers the coase conjecture suggests that infinite durability will eliminate monopoly power analytical results are driven by consumers who drive prices down by waiting for future discounts 3 to the best of our knowledge no one has analyzed the effects of product durability on production and pricing incentives for capacity constrained price setting duopolists b experimental literature the relevant experimental literature consists of three strands a first strand consists of a series of papers establishing that laboratory sellers recognize and exercise the unilateral market power induced by capacity constraints pertinent seminal references are davis and holt 1994 and kruse et al 1994 while some relevant related papers include davis holt and villamil 2002 davis and wilson 2000 and wilson 1998 a second strand of the experimental literature studies the effects of advance production on posted price markets

on the timing of production decisions in monetary economies in most macroeconomic models inflation tends to be harmful in this paper we show that by simply changing the timing of production decisions by firms from on demand to in advance some inflation can boost welfare as long as goods are sufficiently perishable the main conclusion from this research is that by effectively hiding the strategic interaction between supply and demand assuming production on demand is not without loss of generality

countercyclical retirement accounts abstract this paper examines an unconventional but potentially effective new fiscal policy tool that can increase saving during good times and increase spending during bad times a cyclical matching rate on contributions to retirement savings accounts the combination of matching rates and matching limits on retirement savings plans creates sharp kinks in intertemporal budget sets that induce many households to save exactly at the matching limit even when economic conditions might call for a fiscal policy to encourage spending rather than saving what if the matching rate instead disappeared during bad aggregate states i model an economy with liquid and illiquid savings accounts in which matching is suspended during downturns the economy features the usual sources of heterogeneity in education and earnings processes and it allows for time inconsistent preferences and heterogeneity in the discount rate although the theoretical effects of a countercyclical match are ambiguous due to income and substitution effects operating in different directions the simulations of the model indicate that the policy delivers a large average increase in consumption from a set of households that look like the wealthy hand to mouth of kaplan et al 2014 and crucially in contrast to conventional fiscal policy the stimulus associated with countercyclical retirement actually improves the government s financing

home equity mobility and macroeconomic fluctuations how does a fall in house prices affect real activity this paper presents a business cycle model in which a decline in house prices reduces geographical mobility creating distortions in the labor market this happens because homeowners face declines in their home equity levels after which it becomes more difficult to provide the down payment required for a new mortgage loan unemployed homeowners therefore turn down job offers that would require them to move the model explains joint cyclical patterns in housing and labor market aggregates as well as the puzzling breakdown of the u s beveridge curve that occurred during 2009

social security reform with self control preferences abstract this paper analyzes a fully funded social security system under the assumption that agents face temptation issues agents are required to save through individually managed personal security accounts without and with mandatory annuitization when the analysis is restricted to crra preferences our results are congruent with the literature in indicating that the complete elimination of social security is among the reform scenarios that maximize welfare however when self control preferences are introduced and as the intensity of self control becomes progressively more severe the social security elimination scenario loses ground very rapidly in fact in the case of relatively severe temptation the elimination of social security becomes the least desirable alternative under the light of the above findings any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

consumption savings decisions with quasi geometric discounting we study the consumption savings problem of an infinitely lived rational consumer who has time inconsistent preferences in the form of quasi geometric discounting the consumer operates a weakly concave production function and must simply divide current resources into current consumption and savings there is no uncertainty a solution to the consumer s problem is a subgame perfect equilibrium of a dynamic game between the consumer s successive selves we show that this game has a continuum of equilibria in stationary markov strategies not only is the stationary point of the consumer s asset holdings indeterminate but each stationary point has a continuum of dynamic paths converging to it the savings policy rules underlying these dynamic paths are step functions

labor supply elasticity and social security reform abstract previous literature on social security reform has used a variety of period utility functions and calibrated values for the intertemporal elasticity of substitution ies in labor in this paper we show that the effects of social security reforms on aggregate labor supply are invariant to plausible values of the ies but the effect of such reforms on the profile of hours over the life cycle is highly sensitive to the ies we first establish these results analytically in a simple partial equilibrium setting and then demonstrate their robustness in a general equilibrium model calibrated to match key u s macroeconomic indicators we find that the aggregate effects are similar regardless of the wide range of the values of ies used in calibrated economies however social security reform leads to a large reallocation of hours worked over the life cycle from early years to later working years and the size of this reallocation significantly increases with the ies

bounded rationality lifecycle consumption and social security abstract this paper explores an overlapping generations model of bounded rationality in which consumers only foresee the future over a subset of their life span we focus in particular on whether the model can in general equilibrium produce a hump shaped lifecycle consumption profile with a peak that matches data for the average u s consumer for a simple four period model we show that an increasing income profile along with exogenously imposed retirement are sufficient to induce a hump with no other mechanism that can account for a hump besides bounded rationality the model best fits the salient features of consumption data with a planning horizon of 20 years which is well supported by the behavioral evidence found in surveys on retirement planning finally we show that the age of the consumption peak is robust to the introduction of social security mortality risk and another species of bounded rationality quasihyperbolic discounting moreover social security can be welfare improving with a short planning horizon we can calibrate the model to jointly explain the timing of the consumption hump and the optimality of the current social security system with quasihyperbolic discounting instead we can calibrate the model so the current social security system is optimal but we cannot also account for the timing of the consumption hump if we add quasihyperbolic discounting in addition to a short planning horizon the present bias has a negligible effect in equilibrium

unprivatizing the pension system the case of poland in many countries the fiscal tension associated with the global financial crisis brings about the discussion about unprivatizing the social security system this article employs an overlapping generations model to assess ex ante the effects of such changes to the pension reform in poland from 1999 as implemented in 2011 and in 2013 we simulate the behaviour of the economy without the implemented proposed changes and compare it to a status quo defined by the reform from 1999 we find that the changes implemented in 2011 and in 2013 are detrimental to welfare the effects on capital and output are small and depend on the selected fiscal closure implied effective replacement rates are lower these findings are robust to time inconsistency the shortsightedness of the governments imposes welfare costs

collusion in a price quantity oligopoly abstract in the context of an infinitely repeated oligopoly game we study collusion among firms that simultaneously choose prices and quantities we compare a price cartel with a price quota cartel and analyze when and why firms prefer the latter to the former output quota may be required to solve coordination and incentive problems when market demand is sufficiently elastic if market demand is sufficiently inelastic then the cartel faces a trade off between increasing prices and the amount of costly overproduction we find that a price cartel prices consistently below the monopoly price to mitigate excessive production in this case a quota arrangement allows firms to avoid overproduction and to sustain the monopoly price from a policy perspective our findings suggest that an overall price increase in conjunction with more stable prices and market shares is indicative of collusion in industries where production precedes sales and outputs are imperfectly observable

forced saving redistribution and nonlinear social security schemes this paper studies the design of nonlinear social security schemes when individuals differ in productivity and in their degree of myopia myopic individuals may not save enough for their retirement the welfare function is paternalistic the rate of time preference of the farsighted is used for both types we show that the solution does not necessarily imply forced savings for the myopics paternalistic considerations are mitigated by incentive effects numerical results suggest that as the proportion of myopic individuals increases there is less redistribution and more forced saving and the desirability of social security increases

what accounts for the variation in retirement wealth among u s households even among households with similar socioeconomic characteristics saving and wealth vary considerably life cycle models attribute this variation to differences in time preference rates risk tolerance exposure to uncertainty relative tastes for work and leisure at advanced ages and income replacement rates these factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile using the panel study of income dynamics and the consumer expenditure survey we find little support for these implications the data are instead consistent with rule of thumb mental accounting or hyperbolic discounting theories of wealth accumulation jel di d91 e21

production in advance versus production to order abstract we use a theoretical framework to compare production in advance type and production to order type environments carrying out our analysis in the framework of a symmetric capacity constrained bertrand edgeworth duopoly game we prove that the equilibrium profits are the same in case of production in advance and production to order in addition advance production results in higher prices than production to order if both games have an equilibrium in nondegenerated mixed strategies

ramsey meets laibson in the neoclassical growth model the neoclassical growth model is modified to include a variable rate of time preference with no commitment ability and log utility the equilibrium features a constant effective rate of time preference and is observationally equivalent to the standard model the extended framework yields testable linkages between the extent of commitment ability and the rates of saving and growth the model also has welfare implications including the optimal design of institutions that facilitate household commitments steady state results are obtained for general concave utility functions and some properties of the transitional dynamics are characterized for isoelastic utility

the cost of annuities implications for saving behavior and bequests the fact that most elderly u s individuals maintain a flat age wealth profile rather than buy individual life annuities contradicts the standard life cycle consumption model average expected yields on individual life annuities in the united states during 1968 1983 were lower by 4 21 6 13 percent or 2 43 4 35 percent after allowing for adverse selection than yields on plausible alternative investments simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive at older ages the combination of such yield differentials and a bequest motive can do so it is common experience that as we grow older and nearer to eternity we become more not less anxious about money derek brewer chaucer and his world p 213

the adequacy of savings this paper uses newly available data from the social security administration s retirement history survey to examine the adequacy of saving this data source is particularly rich survey data for respondents covering the ydars 1969 197 1 and 1953 have been matched with social security earnings records covering the years dating back to 1951 in addition to information on the path of lifetime earnhngs the survey contains extensive data on individual asset holdings the evidence indicates that surprisingly few couples currantly suffer significant reductions in their standard of living in their old age this appears due in large part to our compulsory savings institutions the social security and private pension systems these institutions have succeeded in redistributing the lifetime consumption of private individuals from their youth to their old age this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this i this abstract was borrowed from another version of this item

the gains from pension reform we classify social security pension systems in three dimensions actuarial versus non actuarial funded versus unfunded and defined benefit versus defined contribution systems recent pension reforms are discussed in terms of these dimensions shifting to a more actuarial system reduces labor market distortions although limiting the scope for redistribution shifting to a funded system may increase saving redistribute income to future generations and distort contermporary labor supply a partial shift to a funded system helps individuals diversify their pension assets a shift from a defined benefit to a defined contribution system means that income risk will be shifted from workers to pensioners

life cycle economies and aggregate fluctuations do the implications for business cycle issues change when we switch from studying infinitely lived representative agent models to more sophisticated demographic structures with finitely lived agents this article addresses that question by using a large overlapping generations model that is calibrated to u s demographic properties microeconomic evidence and national income and product accounts the finding is that the answers obtained are basically the same for the two kinds of models the article also explores the relative volatility of hours across age groups an issue that cannot be addressed by using the infinitely lived representative agent abstraction

commitment and welfare abstract the standard approach to welfare analysis under dynamically inconsistent preferences is to assume that the welfare of an individual is maximized if he can commit to his initial goal we study a potential rationale for such welfare analysis in some prominent well studied examples with intertemporal tradeoffs like the choice between investing in a project now or later doing an unpleasant task now or procrastinating it until later and eating a cake we find that the commitment allocation can multiself pareto dominate the non cooperative equilibrium allocation if the number of time dated selves exceeds a low threshold while a common concern with behavioral welfare analysis is that the later selves of an individual are unfairly hurt as a result of committing the individual to his initial goal our findings indicate that this concern may be more relevant for settings where the number of sequential choices is very low

job uncertainty and deep recessions abstract we study a model where households are subject to uninsurable unemployment risk price setting is subject to nominal rigidities and the labor market is characterized by matching frictions and inflexible wages higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk amplification derives from the combination of incomplete financial markets and frictional goods and labor markets the model can account for key features of the great recession

unemployment in the great recession did the housing market crisis prevent the unemployed from moving to take jobs the labor market in the great recession and its aftermath is characterized by great difficulty in escaping unemployment i present two empirical analyses of a particular explanation for that difficulty that the housing market crisis has prevented the unemployed from selling their homes and moving to take new jobs first i examine post job loss mobility rates by home ownership status using data from the displaced workers survey second i examine mobility rates for unemployed homeowners and renters from the month to month cps match neither analysis provides any support for the idea that the housing market crisis has reduced mobility of the unemployed

proposals to restructure social security the 1995 report of the trustees of social security projected that the combined old age survivor s and disability insurance oasdi trust funds would run out in 2030 this report wasn t much news because the problem was slightly less severe than had been projected the year before the date receded by one year it also wasn t much news because everyone already knew that there was a problem and public confidence in the future of social security was already quite low indeed the fraction of people reporting themselves very or somewhat confident in social security is only around 40 percent this opinion should be taken with a grain of salt since the same surveys show that over 90 percent of the interviewees are expecting to receive social security benefits and commonly expect it as a major source of income reno and friedland forthcoming unlike the medicare problem the oasdi problem does not seem severe to me with prompt legislation we could easily muddle through putting together a package of revenue increases and benefit cuts that would restore actuarial balance for the 75 year horizon 1 in this paper i will not consider the relative merits of alternative packages but will discuss five proposals for basic changes in how social security functions changes that go beyond changing some of the parameters in 1 the country does not seem to have much taste for tax increases right now yet the polls asking about tax increases just for social security find the country solidly behind such increases in an ebri gallup poll 64 percent of respondents favor raising taxes now to lessen tax increases in the future while only 28 percent preferred no tax increase before 2010 a majority oppose 15 percent or strongly oppose 38 percent decreasing benefits by 10 20 percent for those born after 1960 in order to avoid a tax increase since it is always ambiguous how to interpret such a poll and we do not want government by opinion poll this should be viewed as a sampling of mood not as a policy recommendation

temptation driven behavior and taxation a quantitative analysis in a life cycle model i introduction a central research question in the dynamic fiscal policy literature during the last 30 years or so is whether under fairly general modeling choices the government should impose a positive tax on capital income in the long run the original answer to this question is negative and is due to the seminal papers by chamley 1986 and judd 1985 who established that in the context of a standard neoclassical growth model with infinitely lived individuals an optimal income tax policy entails taxing capital at confiscatory rates in the short run and setting capital income taxes equal to zero in the long run only labor income should be taxed in the long run since then several modeling choices that cast doubt on the validity of this result were identified in the literature imrohoroglu 1998 showed that the optimal capital income tax rate is strictly positive in an overlapping generations olg setting where individuals face idiosyncratic earnings risk borrowing constraints and life span uncertainty conesa kitao and krueger 2009 extended imrohoroglu 1998 by adding a labor leisure choice they demonstrated that the optimal capital income tax rate is equal to 36 and concluded that this high rate is mainly driven by the life cycle structure of the model in contrast krusell kuruscu and smith 2010 analytically showed that within a class of ramsey tax schemes the optimal capital income tax rate should be negative that is savings should be subsidized when agents have self control problems moreover in the special case where consumers succumb completely to temptation ramsey taxes deliver first best welfare outcomes and in contrast to the chamley judd result the optimum calls for a subsidy to savings however an integrated assessment of the combined effects of the relevant trade offs both along the dimension of differences in preferences and along the dimension of the scope of capital income taxation versus labor income taxation is missing from all previous studies in both social security and capital taxation literature and this paper aims to bridge the gap in the literature and contribute in this aspect to the best of our knowledge this paper is the first study that introduces temptation driven preferences in a quantitative model aiming to tackle the question on the optimal capital income tax before proceeding to specifically articulate this paper s contribution to the literature we consider critical to address a question that lies at the very core of our line of research namely why fiscal policy models with time inconsistent or self control preferences are relevant in the first place initially the literature pioneered by strotz 1956 and phelps and poliak 1968 corroborated evidence coming from both introspection and experiments that agents exhibit preference reversals as time passes different strands within this literature have suggested that these preference reversals could be induced by either time inconsistent preferences see laibson 1997 or self control preferences gul and pesendorfer 2004 time inconsistent preferences typically assume that agents have sequences of different selves each valuing consumption streams in a unique way in contrast gul and pesendorfer 2004 provide a dynamically consistent model suitable for addressing preference reversals that does not necessitate splitting up the consumer in multiple selves that is self control preferences these preferences describe an individual that in every period is tempted to consume his entire endowment when he consumes less than his endowment he incurs a disutility cost that stems from exercising self control that is self control cost optimal behavior trades off the temptation to consume vis a vis the long run self interest of the individual 1 alongside these theoretical underpinnings there is sound empirical and experimental evidence that agents suffer from self control problems

is there a retirement savings puzzle in this paper we ask whether households are saving enough for their retirement we use data on income expenditure and expenditure components to analyse patterns of behaviour at and around the time of retirement for successive date of birth cohorts we compare periods of unemployment to periods of retirement and separate expenditures into categories reflecting work related expenditures basic necessities and other goods we find that income typically falls by more at unemployment than retirement but the reverse is true for expenditure we observe falls in expenditure at retirement for all expenditure categories using a stochastic life cycle model including mortality rates we assess the anticipated impact of retirement on consumption against that of unemployment the inter relationship between goods and leisure explains a large part of the persistent fall in expenditure at retirement we argue that the only way in which the life cycle hypothesis could be reconciled with the remaining unanticipated dip in consumption would be with the systematic arrival of unexpected adverse information at the time of retirement