time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

dynamic efficiency in overlapping generations models with stochastic production abstract we consider an overlapping generations economy as in diamond amer econ rev 55 1965 1126 1150 with stochastic production we define two types of efficiency for feasible production consumption allocations using first and second degree stochastic dominance we obtain a complete characterization of inefficiency of type i in this model for each given sequence of strictly concave utility functions for all generations the existence of a competitive equilibrium is proved it is shown that each competitive allocation is short run efficient of type ii

individual risk in an investment based social security system this paper examines the risk aspects of an investment based defined contribution social security plan we focus on the risk after the plan is fully phased in individuals deposit a fraction of wages to a personal retirement account pra invest these funds in a 60 40 equity debt mix and in a similarly invested annuity at age 67 the value of the assets follows a random walk with mean and variance of a 60 40 equity debt portfolio over the period 1946 95 a mean log return of 5 5 percent net of administrative costs of 0 4 percent and a standard deviation of 12 5 percent we study he stochastic distributions of this process by doing 10 000 simulations of the 80 year experience of the cohort that reached age 21 in 1998 the resulting annuities are compared to the future defined benefits specified in current law the benchmark benefits with no uncertainty a 5 5 percent log return would permit the benchmark benefits to be purchased with pra deposits of 3 1 percent of payroll only one sixth of the pay as you go tax needed for the benchmark benefits saving a higher share of wages provides a cushion that protects the individual from the risk of an unacceptably low level of benefits for example pra deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0 17 and the probability that they are less than 61 percent of the benchmark to 0 05 pra deposits of 9 percent of wages half of the tax rate required in a pay as you go system would substantially reduce these risks this pure investment based plan is an extreme case the investment risk can be reduced further by using a mixed system that combines pay as you go and investment based components or that makes intergenerational transfers conditional on the performance of stock and bond prices this abstract was borrowed from another version of this item

the hyperbolic consumption model calibration simulation and empirical evaluation ur preferences for the long run tend to conflict with our short run behavior when planning for the long run we intend to meet our deadlines exercise regularly and eat healthfully but in the short run we have little interest in revising manuscripts jogging on the stairmaster and skipping the chocolate souffleala mode delay of gratification is a nice long term goal but instant gratification is disconcertingly tempting this gap between long run intentions and short run actions is apparent across a wide range of behaviors including saving choices a 1997 survey found that 76 percent of respondents believe they should be saving more for retirement looking only at respondents who believed they were at an age where you should be seriously saving already the survey found that 55 percent reported being behind in their savings and only 6 percent reported being ahead farkas and johnson 1997 the report on the survey concluded t he gaps between people s atti tudes intentions and behavior are troubling and threaten increased insecurity and dissatisfaction for people when they retire americans are simply not doing what logic and their own reasoning suggests they should be doing a 1993 luntz webber merrill lynch survey found similar answers when baby boomers were asked what percentage of your annual household income do you think you should save for retirement and what percentage of your annual

health investment saving and public policy this paper develops an overlapping generations model in which agents invest in health to prolong life in both working and retirement periods it explores how unfunded social security with or without health subsidies affects life expectancy economic growth and welfare in particular by extending life at a possible cost of capital accumulation health subsidies and a pay as you go pension can improve welfare especially in the short run

approximate versus exact equilibria in dynamic economies this paper develops theoretical foundations for an error analysis of approximate equilibria in dynamic stochastic general equilibrium models with heterogeneous agents and incomplete financial markets while there are several algorithms that compute prices and allocations for which agents first order conditions are approximately satisfied approximate equilibria there are few results on h interpret the errors in these candidate solutions and how to relate the computed allocations and prices to exact equilibrium allocations and prices we give a simple example to illustrate that approximate equilibria might be very far from exact equilibria we then interpret approximate equilibria as equilibria for close by economies that is for economies with close by individual endowments and preferences

intergenerational redistribution with short lived governments we study the politics of intergenerational redistribution in an overlapping generations model with short lived governments the successive governments who care about the welfare of the currently living generations and possibly about campaign contributions are unable to pre commit the future course of redistributive taxation in a stationary politico economic equilibrium the intergenerational transfer in each period depends on the current value of the state variable and all expectations about future political outcomes are fulfilled we find that there exist multiple stationary equilibria in many political settings steady state welfare is often lower than it would be in the absence of redistributive politics

money competitive efficiency and intergenerational transactions abstract this paper shows that a three period overlapping generations model with an inverse v life cycle endowment structure can generally restore the first welfare theorem without imposing price characterization conditions even when walras s law fails a walrasian equilibrium may be optimal in a three period model depending on the endowment and generational structure if middle aged generations have sufficiently high income so that both the old and the young are net borrowers transactions are generation by generation bilaterally balanced thus ruling out potentially better but unenforceable contracts in equilibrium and ensuring competitive efficiency when there are imbalances fiat money which serves as a medium of intergenerational exchanges becomes valuable

idiosyncratic risk aggregate risk and the welfare effects of social security we ask whether a pay as you go financed social security system is welfare improving in an economy with idiosyncratic productivity and aggregate business cycle risk we show analytically that the whole welfare benefit from joint insurance against both risks is greater than the sum of benefits from insurance against the isolated risk components one reason is the convexity of the welfare gain in total risk the other reason is a direct risk interaction which amplifies the utility losses from consumption risk we proceed with a quantitative evaluation of social security s welfare effects we find that introducing an unconditional minimum pension leads to substantial welfare gains in expectation even net of the welfare losses from crowding out about 60 of the welfare gains would be missing when simply summing up the isolated benefits

hedonic price indexes for spreadsheets and an empirical test for network externalities in this article i first estimate hedonic price equations for computer spreadsheet programs and then use the analysis to empirically test whether network externalities exist in this industry the study shows that consumers are willing to pay a significant premium for spreadsheets that are compatible with the lotus platform and for spreadsheets that offer links to external databases and a similar premium for spreadsheets that offer local area network externalities finally the quality adjusted real price of computer spreadsheets declined by approximately 15 per year from 1986 to 1991

fair demographic risk sharing in defined contribution pension systems in this article we formulate and solve the optimal design problem of a defined contribution public pension fund in a highly stylized but still rather general non stationary framework we adopt the viewpoint of a benevolent social planner who aims at treating in a fair manner the successive overlapping generations participating to such a long term mandatory system using the approach of el karoui and jeanblanc 1998 for the optimal consumption and portfolio choice problem with random income in a complete market we exhibit a solution to our intertemporal stochastic control problem where each generation receives a fair lumpsum retirement benefit it is proportional to the contributions she has paid during her active worklife and follows a fixed common rule although her pension value itself may depend on variables only observable at her retirement time we next relax the assumption that the collective pension system is mandatory and investigate the performance of individual investment plans in the market comparing the outcomes of both alternatives we derive a condition under which the collective fund can be expected to overperform the individual plan in the special case of a stationary economy such a possibility has been pointed out by gollier 2008 in fact this effect results from the possibility for the collective fund to borrow today against contributions of future generations which allows to implement riskier strategies and may improve its performance

on price taking equilibria in club economies with nonanonymous crowding abstract competitive equilibrium in a coalition production economy or a club economy typically does not exist when there is free entry for two reasons first there may be an integer problem as is familiar from club theory with anonymous crowding second optimal groups may have different compositions from the population and then even if there is no integer problem it may be impossible to partition the population into optimal groups i define a notion of approximate equilibrium and show that such an equilibrium always exists in a sufficiently large economy i focus on the optimal size of the economy rather than of clubs

structural reform of social security governments around the world have enacted or are currently considering fundamental structural reforms of their social security pension programs the key feature in these reforms is a shift from a pure pay as you go tax financed system in which taxes on current workers are primarily distributed to current retirees to a mixed system that combines pay as you go benefits with investment based personal retirement accounts this paper discusses how such a mixed system could work in practice and how the transition to such a change could be achieved it then analyzes the economic gains that would result from shifting to a mixed system i turn next to the three problems that critics raise about any investment based plan administrative costs risk and income distribution finally i comment on some of the ad hoc proposals for dealing with the financial problem of social security without shifting to an investment based system

asset allocation and location over the life cycle with investment linked survival contingent payouts abstract this paper shows how survival contingent investment linked payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations in exchange for illiquidity these products provide the consumer with access to mutual fund style portfolio choice as well as the survival credit generated from pooling mortality risk our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival contingent payouts over the lifetime and also asset allocation paths showing how to invest in stocks versus bonds we show that the investor who moves her money out of liquid saving into survival contingent assets gradually from middle age to retirement and beyond will enhance her welfare by as much as 50 the results are robust to the introduction of uninsurable consumption shocks in housing expenses income flows during the worklife and retirement sudden changes in health status and medical expenses

quantifying the risk sharing welfare gains of social security the welfare effects of intergenerational risk sharing through a pay as you go social security system that is efficiently indexed to wages or interest rates are quantified comparing steady states there are large welfare gains of being born into an economy with efficient risk sharing as compared to the current u s system efficient policy involves an increasingly risky net of tax income over the life cycle when adjustment to steady state is taken into account the welfare gains largely turn negative the results are also compared and contrasted to the first best allocation

a theorist s view of experiments the paper springs from a position that economic theory is an abstract investigation of the concepts and considerations involved in real life economic decision making rather than a tool for predicting or describing real behavior it is argued that when experimental economics is motivated by theory it should not look to verify the predictions of theory but instead should focus on verifying that the considerations contained in the economic model are sound and in common use it is argued that when theory is motivated by experiments the theorist should not be hasty in adopting new functional forms but should try to identify the basic psychological themes which are revealed exposed by the experiment finally some critical comments on the methodology of experimental economics are presented 2001 elsevier science b v all rights reserved jel classi cation b0 c9

optimal long run fiscal policy constraints preferences and the resolution of uncertainty we construct a computational dynamic stochastic overlapping generations general equilibrium model with uncertain lifetimes and explore the impact of policy stickiness specifically a major reform will preclude future reforms for a generation on optimal long run fiscal policy under such circumstances entitlement reforms exhaust a valuable option to move in the future we explore the conditions under which the gain to waiting is large enough to induce optimizing policymakers to delay reforming a suboptimal system we also allow for the uncertainty to have arch characteristics and explore the impact of time varying uncertainty on the optimality of delayed policy action

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

markov perfect equilibria in altruistic growth economies with production uncertainty this paper concerns the existence of markov perfect equilibria in altruistic growth economies previous work on deterministic models has established existence only under extremely restrictive conditions we show that the introduction of production uncertainly yields an existence theorem for aggregative infinite horizon models with very general forms of altruism journal of economic literature classification numbers

funded pensions and intergenerational and international risk sharing in general equilibrium we explore intergenerational and international risk sharing in a general equilibrium multiple country model with two tier pensions systems the exact design of the pension system is key for the way in which risks are shared over generations the laissez faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks however the existence of wage indexed bonds combined with a pension system with a fully funded second tier that pays defined wage indexed benefits can reproduce the first best if wage indexed bonds are not available mimicking the first best is not possible except under special circumstances we also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings with wage indexed bonds this incentive is absent while there is indeed such an incentive when wage indexed bonds do not exist

stochastic olg models market structure and optimality for a general class of pure exchange olg economies under uncertainty we provide a complete characterization of the efficency properties of competitive equilibria when markets are only sequentially complete and the criterion of efficency is conditional pareto optimality we also consider a particular case in which markets fail to be even sequentially complete and provide a characterization when the criterion of efficency is weakened to ex post pareto optimality

intergenerational risk sharing via social security when financial markets are incomplete this paper develops an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system can lead to a pareto improvement even if the initial equilibrium is neither production ine cient in the spirit of diamond 1965 nor dynamically ine cient in the spirit of samuelson 1957 when returns to capital and wages are imperfectly correlated and subject to aggregate shocks then the consumption variance of all generations can be reduced if private markets or government policies enable them to pool their labor and capital incomes a social security system that endows retired households with a claim to labor income may serve as an e ective tool to share aggregate risk between gener

social security and the rise in health spending abstract in a quantitative model of social security with endogenous health i argue that social security increases the aggregate health spending of the economy because it redistributes resources to the elderly whose marginal propensity to spend on health is high i show by using computational experiments that the expansion of us social security can account for over a third of the dramatic rise in us health spending from 1950 to 2000 in addition social security has a spill over effect on medicare as social security increases health spending it also increases the payments from medicare thus raising its financial burden

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

designing social security a portfolio choice approach public social security systems may provide diversification of risks to individuals life time income capturing that a pay as you go program paygo may be considered as a quasiasset we study the optimal size of the social security program as well as the optimal split between a funded part and a paygo part by means of a theoretical portfolio choice approach a low yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources moreover a funded part of the social security system can be justified by potential imperfections to the individuals free access to the stock market numerical calculations for sweden norway the us and the uk demonstrate that the optimal size of paygo part of the pension program varies considerably in response to differences in projected growth rates and the correlation between stock returns and growth our calculations suggest that a paygo program has an important role in the three former countries but not in the u k

the missing piece in policy analysis social security reform this lecture discusses the economic losses that result from an unfunded social security retirement system and the potential gain from shifting to a funded system the social security payroll tax distorts labor supply and the form in which compensation is paid although each individual s benefits are linked to that individual s previous payroll tax payments the low equilibrium rate of return inherent in an unfunded system implies a net payroll tax that causes distortions the resulting deadweight loss is 1 of each year s gdp in perpetuity an amount equal to 20 of payroll tax revenue and a 50 increase in deadweight loss of the personal income tax also there is the loss of investment income resulting from forcing employees to accept the low implicit return of an unfunded program rather than the much higher return paid on private saving or in a funded social security program the present value of the annual losses from using an unfunded system exceeds the benefit to those who received windfall transfers when the program began and when it expanded shifting to a funded program cannot reverse the crowding out of capital that has already occurred recognizing the existing unfunded obligation only makes that piece of the national debt explicit but shifting to a funded program limits crowding out of capital formation to the amount that already occurred future increases in annual saving that result from economic growth are able to earn the higher rate of return on real capital the present value of these gains is equivalent to a perpetuity of more than 2 of gdp a year the combi nation of improved labor market incentives and higher real return on saving has a net present value gain of more than 15 trillion an amount equivalent to three percent of each future year s gdp forever this abstract was borrowed from another version of this item

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

risk preferences in multi period consumption models the equity premium puzzle and habit formation utility abstract the relationship between the relative risk aversion measure for the utility function for consumption and that for the value function for wealth is a derived relationship whose properties depend on how consumption and wealth are defined and measured this fact together with information concerning estimates for these two relative risk aversion measures is used to give another perspective on the equity premium puzzle and to explain why it is that the habit formation utility function is effective in eliminating that puzzle a time separable utility function that can serve as an alternative to the assumption of habit formation is also presented

frames of mind in intertemporal choice recent research has demonstrated that choices between gambles are systematically influenced by the way they are expressed kahneman and tversky s prospect theory kahneman d a tversky 1979 prospect theory an analysis of decision under risk econometrica472 363 391 explains many of these framing effects as shifts in the point of reference from which prospects are evaluated this paper demonstrates the applicability of the reference point concept to intertemporal choice three experiments demonstrate that when people choose between immediate and delayed consumption the reference point used to evaluate alternatives can significantly influence choice the first study elicited relative preference for immediate and delayed consumption using three methods each of which differently framed choices between alternatives offering identical end state consumption the conventional discounted utility model predicts that the three methods of elicitation should yield similar estimates of time preference but preferences were found to differ in accordance with a reference point model the second and third studies extend and replicate the results from the first the third using real rather than hypothetical choices

pensions and intergenerational risk sharing in general equilibrium we investigate intergenerational risk sharing in two pillar pension systems with a pay as you go pillar and a funded pillar the funded pension pillar can be either defined contribution or defined benefit only a defined benefit scheme with an appropriate investment policy establishes optimal intergenerational risk sharing we show how the pension system affects capital markets in general and the equity premium in particular

endogenous market incompleteness without market frictions dynamic suboptimality of competitive equilibrium in multiperiod overlapping generations economies abstract in this paper we show that within the set of stochastic three period lived olg economies with productive assets such as land markets are necessarily sequentially incomplete and agents in the model do not share risk optimally we start by characterizing perfect risk sharing and find that it requires state dependent consumption claims which depend only on the exogenous shock realizations we show then that the recursive competitive equilibrium of any overlapping generations economy with weakly more than three generations is not strongly stationary this then allows us to show directly that there are short run pareto improvements possible in terms of risk sharing and hence that the recursive competitive equilibrium is not pareto optimal we then show that a financial reform which eliminates the equity asset and replaces it with zero net supply insurance contracts arrow securities will implement to pareto optimal stochastic steady state known to exist in the model finally we also show via numerical simulations that a system of government taxes and transfers can lead to a pareto improvement over the competitive equilibrium in the model

on the existence of optimal stationary equilibria with a fixed supply of fiat money i the case of a single consumer this paper generalizes samuelson s well known analysis concerning the use of fiat or outside money to support pareto optimal allocations in an overlapping generations framework while maintaining an elementary demographic structure butexpanding the list of available commodities in each period we establish the following result if there is a fixed supply of fiat money and individuals are also permitted to issue bonds or inside money then there always exists at least one stationary equilibrium yielding a pareto optimal allocation

productivity and welfare in an overlapping generations model with housing abstract productivity and welfare can have an inverse relationship this paper describes an overlapping generations model where housing is the savings vehicle and utility is provided by housing and a consumption good if intratemporal substitution between the consumption good and housing is sufficiently inelastic aggregate utility is decreasing in productivity at higher levels of productivity the relative scarcity of housing aggravates the problem of oversaving

voluntary participation and intergenerational risk sharing in a funded pension system we explore the feasibility of a funded pension system with intergenerational risk sharing when participation in the system is voluntary typically the willingness of the young to participate depends on their belief about the future young s willingness to do so we characterise equilibria with voluntary participation and show that the likelihood of their existence increases with risk aversion and financial market uncertainty we find that mandatory participation is often necessary to sustain a funded pension pillar and to let participants benefit from intergenerational risk sharing

the economics of indeterminacy in overlapping generations models abstract recent research indicates that there are robust examples of overlapping generations economies in which there are indeterminate equilibria without fiat money and equilibria with more than one dimension of indeterminacy this paper presents simple examples of a stationary pure exchange overlapping generations economy with one good in each period and a representative consumer who lives for three periods in each generation these examples exhibit every possible form of indeterminacy and instability furthermore the parameters of the principal example agree with empirical evidence we use our examples as case studies for analyzing the problems involved in computing the equilibria of such economies

dominant root characterization of pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models abstract we characterize pareto optimality of interior stationary allocations in single good overlapping generations models with stochastic aggregate shocks and heterogeneous but recurring generations an interior stationary allocation is pareto optimal if and only if it is an equilibrium allocation and the associated contingent claims price matrix has a dominant root less than or equal to unity we then use this characterization to show that there always exists an optimal equilibrium with or without valued fiat money

consumption and portfolio rules for time inconsistent investors abstract this paper extends the classical consumption and portfolio rules model in continuous time merton r c 1969 lifetime portfolio selection under uncertainty the continuous time case review of economics and statistics 51 247 257 merton r c 1971 optimum consumption and portfolio rules in a continuous time model journal of economic theory 3 373 413 to the framework of decision makers with time inconsistent preferences the model is solved for different utility functions for both naive and sophisticated agents and the results are compared in order to solve the problem for sophisticated agents we derive a modified hjb hamilton jacobi bellman equation it is illustrated how for crra functions within the family of hara functions logarithmic and power utilities the optimal portfolio rule does not depend on the discount rate but this is not the case for a general utility function such as the exponential cara utility function

social security and risk sharing abstract in this paper we identify conditions under which the introduction of a pay as you go social security system is ex ante pareto improving in a stochastic olg economy with capital accumulation and land we argue that these conditions are consistent with realistic specifications of the parameters of the economy in our model financial markets are complete and competitive equilibria interim pareto efficient therefore a welfare improvement can only be obtained if agents welfare is evaluated ex ante and arises from an improvement in intergenerational risk sharing we also examine the optimal size of a given social security system as well as its optimal reform

population aging social security and fiscal limits abstract we use an overlapping generations olg life cycle model with distortionary taxation on labor and capital to derive a threshold dependency ratio i e a point in the cross section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees we quantify the level of the threshold the distance of the economy from the threshold and the probability of reaching the threshold at some point in the future the model is calibrated on the united states and fourteen european countries which have dependency ratios among the highest in the world we examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems new tax data on dynamic laffer effects are provided

intergenerational risk shifting through social security and bailout politics abstract this paper adopts a stochastic overlapping generations framework to analyze the allocation of aggregate financial risks under different social security systems and a majority voting rule we study whether there will be switches between pay as you go payg and fully funded ff systems in such an economy we show that in case of a negative aggregate shock low income young individuals will form a political coalition with the elderly to implement a payg system payg scheme is shown to persist even after a good aggregate shock if the system is redistributive enough

risk sharing across generations without publicly owned equities abstract the u s social security trust fund currently invests in government bonds investing some of it instead in equities while continuing to pay social security benefits under existing rules would alter potentially improve the sharing of financial risks across non trading generations this paper shows that the same risk sharing can be achieved without direct government ownership of equities if instead the government places a linear and symmetric tax on risky private capital returns this equivalence is very robust and holds even if some agents are endogenously borrowing constrained

a rational economic model of paygo tax rates abstract we argue that paygo rates are determined by a representative agent and a benevolent government jointly maximizing the expected life time utility of the agent the distributions of labor and capital income are calculated from national data on real gdp real wages and the real return to capital since 1950 with uniform risk aversion predicted rates explain 83 of the variance of observed rates the globalization of capital markets would lead to convergence of paygo rates our results are immune to crises like 2008

exploring the trade off between immediate gratification and delayed network externalities in the consumption of information goods abstract our motivation for this paper originates from recent advances in consumption and payment technologies available for mobile commerce ubiquitous computing is enabling consumers worldwide to reach digital content and services whenever and wherever they request it this capability further fuels impatience in consumption of such information goods we model such consumer behavior using a hyperbolic discounting approach a subset of these products especially software also inherit delayed network externalities as part of their consumption characteristics this builds a tension between decision to consume now or to expedite consumption we build a stylized model to assess the impact of immediate gratification on the profit maximizing behavior of a monopolist firm which produces an information good with network externalities we find that serving impatient consumers is always profitable for a monopolist for lower levels of network externalities the monopolist can increase first period and decrease second period prices in equilibrium as network externalities effect increases prices converge to the traditional market with exponential discounters levels

political intergenerational risk sharing abstract in a stochastic two period olg model featuring an aggregate shock to the economy ex ante optimality requires intergenerational risk sharing we compare the level of intergenerational risk sharing chosen by a benevolent government and by an office seeking politician in our political system the transfer of resources across generations is determined as a markov equilibrium of a probabilistic voting game low realized returns on the risky asset induce politicians to compensate the old through a payg system this political system typically generates an intergenerational risk sharing scheme that is i larger ii more persistent and iii less responsive to the realization of the shock than the social optimum this is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers and hence overspends

equilibrium indeterminacy in a model of constrained financial markets i present a general equilibrium model with incomplete markets in which assets pay in units of a numeraire good in this economy agents are constrained to negotiate the same amount of assets in different states of the world different from the standard result of economies with real assets equilibrium indeterminacy can arise depending on the structure of the financial markets equilibrium fails to be unique when it is not possible to transfer wealth between states in which consumers trade a pair of assets that face the same restriction

the optimal mix between funded and unfunded pension systems when people care about relative consumption the paper studies the optimal portfolio mix between funded and unfunded pension systems when people care about relative consumption in pay as you go systems with fixed contribution rates pensions are tied to wages this lowers the uncertainty of individuals future relative position thereby increasing the attractiveness of unfunded systems the paper shows analytically that the optimal share of funding decreases with the importance of relative standing a calibrated version of the model suggests that the concern for relative standing has also a quantitatively important impact on the optimal share of funding for reasonable assumptions it is typically around 20

choice and procrastination author s o donoghue ted rabin matthew abstract recent models of procrastination due to self control problems assume that a procrastinator considers just one option and is unaware of her self control problems we develop a model where a person chooses from a menu of options and is partially aware of her self control problems this menu model replicates earlier results and generates new ones a person might forego completing an attractive option because she plans to complete a more attractive but never to be completed option hence providing a non procrastinator additional options can induce procrastination and a person may procrastinate worse pursuing important goals than unimportant ones

the survival of the welfare state this paper provides an analytical characterization of markov perfect equilibria in a model with repeated voting where agents vote over distortionary income redistribution a key result is that the future constituency for redistributive policies depends positively on current redistribution since this affects both private investments and the future distribution of voters the model features multiple equilibria in some equilibria positive redistribution persists forever in other equilibria even a majority of beneficiaries of redistribution vote strategically so as to induce the end of the welfare state next period skill biased technical change makes the survival of the welfare state less likely

decentralization in replicated club economies with multiple private goods abstract we show that exhaustion of blocking opportunities is a sufficient condition such that every allocation in the core of a replicated club economy can be decentralized as a competitive equilibrium and that a related condition efficient scale is necessary and under an assumption on endowments sufficient such that competitive equilibrium exists and the core is nonempty these results do not require the euclidean structure and monotonicity assumed in lindahl equilibrium do not require convexity of preferences or costs and do not require the strong assumption that private goods are essential journal of economic literature classification numbers d46 d50 d61 h40

bond market clienteles the yield curve and the optimal maturity structure of government debt we propose a clientele based model of the yield curve and optimal maturity structure of government debt clienteles are generations of agents at different life cycle stages in an overlappinggenerations economy an optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing if agents are more risk averse than log then an increase in the long horizon clientele raises the price and optimal supply of long term bonds but while a welfare maximizing government caters to clienteles it does not accommodate fully their demand and limits issuance of long term bonds to a level where these earn negative expected excess returns

intergenerational risk sharing and fiscal policy abstract risk sharing implications of alternative fiscal policies are compared in a stochastic production economy with overlapping generations ex ante efficiency is shown to be achievable with optimal transfers regardless of distributional concerns for crra preferences stylized real world policies notably safe debt and safe pensions are found inefficient in the direction of imposing not enough productivity risk on retirees and too much on future generations safe transfers can be rationalized as efficient if preferences display age increasing risk aversion such as habit formation the ubiquity of safe transfers suggests that governments treat the young as more risk tolerant than older cohorts

discount rates inferred from decisions an experimental study two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 4 4 factorial design scenario postponing a receipt postponing a payment expediting a receipt expediting a payment time delay 0 5 1 2 and 4 years and size of cashflow 40 200 1000 and 5000 individual discount rates were inferred from the responses and then used to test competitively four hypotheses regarding the behavior of discount rates the classical hypothesis asserting that the discount rate is uniform across scenarios time delays and sums of cashflow was flatly rejected a market segmentation approach was found lacking the results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position

intergenerational risk sharing and endogenous labour supply within funded pension schemes funded defined benefit pensions add to welfare on account of providing intergenerational risk sharing but lower it on account of inducing labour supply distortions we show that a properly designed funded defined benefit pension scheme involves a welfare improvement even if contributions are distortionary and even if individuals face potentially correlated wage and equity risks numerical calculations indicate that diversification gains from risk sharing are large compared to the losses related to labour supply distortions this result withstands a number of extensions like the introduction of a short sale constraint for individuals or the inclusion of a labour income tax

the impact of digital channel distribution on the experience goods industry abstract we explore the impact of a digital channel for experience goods on the profitability and behavior of players in the supply chain and on piracy we consider a firm which can sell an experience good in physical form in digitized form or both we analyze different pricing schemes price for whole album on the retail channel and linear and nonlinear pricing for songs on the digital channel consumers are divided into a retail captive segment whose consumers are limited to the retail channel and a hybrid segment whose consumers have access to both retail and digital channels our findings indicate that for realistic problems the dual distribution channel is most profitable the profitability of the retail channel increases with the size of the retail captive segment and the number of desirable songs on an album relative to the total number of songs on it we show that a skimming pricing strategy is best for the retail channel the ability to sell the product in digitized form on the internet erodes much of the power once enjoyed by the record labels the digital channel may be the best way to promote new artists especially when the hybrid consumer segment is large we also find that piracy has a significant effect on channel profits for both the retail and digital channels piracy has the strongest negative impact on the exclusive retail channel consumers access to the digital channel reduces piracy in both digital and dual channel distribution dual channel suffers least from piracy because it allows retail captive consumers to still legally obtain the product

democratic public good provision this paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting expenditures are financed through age dependent taxation that distorts human capital investment taxes redistribute income both across skill groups and across generations we focus on politico economic markov equilibria and contrast these with the ramsey allocation under commitment the model features indeterminate equilibria with a key role of forward looking strategic voting due to the lack of commitment to future policies the tax burden may be on the wrong side of the dynamic laffer curve moreover restrictions on government policies can in some cases be welfare improving

markov rational expectations equilibria in an overlapping generations model abstract in this paper we analyze rational expectations equilibrium paths in a stochastic overlapping generations model the work presented here builds on results of s e spear j econ theory 35 1985 251 275 where is is shown that in a model with multiple goods and time non separable preferences a stochastic steady state equilibrium will generically fail to exist a stochastic steady state is defined as an equilibrium in which the stochastic process of endogenously determined variables is measure isomorphic to the exogenous process driving the model in this paper we establish the existence of non steady state equilibria and provide a characterization of their stochastic properties

financial markets intermediaries and intertemporal smoothing in an overlapping generations economy with incomplete financial markets but no intermediaries there is underinvestment in safe assets in an economy with intermediaries and no financial markets accumulating reserves of safe assets allows returns to be smoothed nondiversifiable risk to be eliminated and an ex ante pareto improvement compared to the allocation in the market equilibrium to be achieved in a mixed financial system however competition from financial markets constrains intermediaries so that they perform no better than markets alone

social security taxation and intergenerational risk sharing the life cycle hypothesis has become the dominant mode used to analyze the effects of a social security system on private saving the labor leisure choice and social welfare as both barro and samuelson indicate a fully funded social security program in a world of certainty would drive out an equivalent amount of private saving if the interest rate is r the effects of a payment of a dollar into the social security pool while young would just offset the effects of receiving 1 r dollars as a transfer when retired papers by diamond hi and samuelson among others have examined the effects of non fully funded social security schemes in a growing economy a non fully funded program can be used to alter the private sector s saving rate and hence the capital labor ratio social security then can be used as a policy tool for achieving the or some variant of the golden rule growth path this abstract was borrowed from another version of this item

intergenerational risksharing and equilibrium asset prices in the presence of overlapping generations a social security system with contingent taxes and benefits can affect both asset prices and intergenerational risksharing in a simple model with two risky factors of production human capital owned by the young and physical capital owned by all older generations a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital such a system reduces precautionary saving and increases the riskbearing capacity of the economy under plausible conditions it increases the riskless interest rate and lowers the price and risk premium of physical capital

two sided network effects a theory of information product design how can firms profitably give away free products this paper provides a novel answer and articulates trade offs in a space of information product design we introduce a formal model of two sided network externalities based in textbook economics a mix of katz and shapiro network effects price discrimination and product differentiation externality based complements however exploit a different mechanism than either tying or lock in even as they help to explain many recent strategies such as those of firms selling operating systems internet browsers games music and video the model presented here argues for three simple but useful results first even in the absence of competition a firm can rationally invest in a product it intends to give away into perpetuity second we identify distinct markets for content providers and end consumers and show that either can be a candidate for a free good third product coupling across markets can increase consumer welfare even as it increases firm profits the model also generates testable hypotheses on the size and direction of network effects while offering insights to regulators seeking to apply antitrust law to network markets

intergenerational risk sharing in the spirit of arrow debreu and rawls with applications to social security design this paper examines the optimal allocation of risk in an overlapping generations economy it compares the allocation of risk the economy reaches naturally to the allocation that would be reached if generations behind a rawlsian veil of ignorance could share risk with one another through complete arrow debreu contingent claims markets the paper then examines how the government might implement optimal intergenerational risk sharing with a social security system one conclusion is that the system must either hold equity claims to capital or negatively index benefits to equity returns

who benefits from public old age pensions evidence from a targeted program abstract given the aging of the population policies relating to the design and reform of public pension programs are prominent in policy debates for many developing countries a major concern centers around the possible displacement of traditional family based support by public programs one challenge in estimating this displacement or crowding out is the endogeneity of social security benefits the incidence and size of benefits may be correlated with unobserved determinants of private transfers especially if benefits are means tested using two rich data sets this article explores the impact of the taiwanese farmers pension program fpp on recipients and their noncohabiting adult children the fpp is targeted at elderly farmers and has relatively clean exogenous rules for eligibility that allow the endogeneity problem to be addressed estimates from multiple identification strategies consistently imply that 1 dollar of pension crowds out 30 39 cents of private transfers received by the elderly

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

recursive equilibrium in stochastic overlapping generations economies we prove the generic existence of a recursive equilibrium for overlapping generations economies with uncertainty generic here means in a residual set of utilities and endowments the result holds provided there is a sufficient number of potentially different individuals within each cohort

informational diversity over time and the optimality of monetary equilibria abstract the temporal realizations of a random state variable in an overlapping generations model create an informational diversity between members of different generations and require a reexamination of the optimality that competitive equilibria might display in such an environment using an optimality criterion that reflects this informational diversity we prove the optimality of competitive equilibrium in a model with a fixed stock of fiat money a single spot market and good endowments that follow a markov process the need for an optimality criterion that incorporates informational diversity is further motivated by studying the same model with the operation of complete contingent commodities markets

annuitization and asset allocation this paper examines the optimal annuitization investment and consumption strategies of a utility maximizing retiree facing a stochastic time of death under a variety of institutional restrictions we focus on the impact of aging on the optimal purchase of life annuities which form the basis of most defined benefit pension plans due to adverse selection acquiring a lifetime payout annuity is an irreversible transaction that creates an incentive to delay under the institutional all or nothing arrangement where annuitization must take place at one distinct point in time i e retirement we derive the optimal age at which to annuitize and develop a metric to capture the loss from annuitizing prematurely in contrast under an open market structure where individuals can annuitize any fraction of their wealth at anytime we locate a general optimal annuity purchasing policy in this case we find that an individual will initially annuitize a lump sum and then buy annuities to keep wealth to one side of a separating ray in wealth annuity space we believe our paper is the first to integrate life annuity products into the portfolio choice literature while taking into account realistic institutional restrictions which are unique to the market for mortality contingent claims

intergenerational redistribution in the great recession in this paper we construct a stochastic overlapping generations general equilibrium model in which households are subject to aggregate shocks that aect both wages and asset prices we use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across dierent household age groups the model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages asset price declines hurt the old who rely on asset sales to nance consumption but benet the young who purchase assets at depressed prices in our preferred calibration asset prices decline more than twice as much as wages consistent with the experience of the us economy in the great recession a model recession is approximately welfare neutral for households in the 20 29 age group but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over

short memory equilibrium in stochastic overlapping generations economies abstract in stochastic olg exchange economies we show that short memory equilibria the natural extension from deterministic economies of steady states low order cycles or finite state space stationary sunspots equilibria fail to exist generically in utilities as a result even with independent and identically distributed exogenous shocks there is serial correlation in endogenous economic variables in equilibrium this arises even if utilities are time separable some goods inferior and there are no technological lags hence the origins of economic fluctuations can be traced only to the demographic structure of a heterogeneous agent multiple good economy

rational expectations in the overlapping generations model abstract this paper reports results on the character of the rational expectations equilibria of a stochastic overlapping generations model with heterogenous markets the model considered is a stationary overlapping generations model in which the endowments of young agents are subject to i i d random shocks the main result shown is that if there are l 1 commodities traded in every period then for most preferences the rational expectations equilibrium stochastic process of prices and allocations necessarily exhibits serial correlation this is in marked contrast to the one commodity model in which there always exists an equilibrium which is measure isomorphic to the endowment process