further results on asset pricing with incomplete information abstract this paper extends the analysis of asset pricing when information is incomplete by relaxing some of the restrictive assumptions of the gaussian model studied earlier in the literature for the information structure considered the posterior beliefs of the investor the conditional distribution of the current state given the past observations are characterized by two sets of sufficient statistics implementable in the form of a filter i the vector of conditional means and ii a set of sufficient statistics for the conditional variance covariance matrix a separation theorem is demonstrated and used to produce a closed form solution for the interest rate process when the investor s utility function is logarithmic in this context we examine the informational efficiency properties of the interest rate and analyze the stochastic shifts in the volatility of the interest rate process

settlement tax and non synchronous effects in the basis of u k stock index futures abstract the basis in stock index futures markets is analytically and empirically studied in this paper within a no arbitrage cost of carry framework explanatory power improved when the implications of the u k stock exchange settlement system were introduced into the modelling process and until recently with the maturity of the market evidence indicating the presence of non synchronicities between the cash and futures markets was found strong evidence for tax effects upon the basis was not found to be present in the data analysed statistically significant relationships between basis mispricing and volume and volatility were found

general equilibrium pricing of cpi derivatives we examine the issue of pricing forward futures and option contracts written on the consumer price index cpi the change of which is a measure of inflation affecting the economy traditional approaches postulate an exogenous process for the price level and then derive cpi derivatives prices by standard arbitrage arguments by contrast we build the general equilibrium of a continuous time monetary economy that is affected by both real and nominal shocks the price level and thus the inflation rate are found endogenously and solutions for the prices of cpi derivatives are obtained which are in closed form in a specialized version of the economy

consumption and equilibrium interest rates in stochastic production economies in this paper we analyze the behavior of equilibrium real interest rates in an identical consumer economy in which the preferences are represented by time additive logarithmic utility functions and production technologies are cobb douglas with stochastic constant returns to scale the following main results are established i when there is no relative price uncertainty it is shown that the equilibrium interest rate exhibits a mean reverting tendency a nontrivial steady state distribution is found to exist for the equilibrium interest rate the properties of the equilibrium interest rate are also derived and discussed ii in a multigood economy even with additive preferences across goods the equilibrium interest rates depend explicitly on relative prices the substitution possibilities in production technologies induce this result this is in contrast to the findings of richard and sundaresan 11 who show that the analytical general equilibrium term structure of interest rates formula of cox ingersoll and ross 5 is unaffected by the introduction of relative price uncertainty when the technologies are linear and hence involve no substitution furthermore we relate our results to those of cox ingersoll and ross 5 breeden 3 and richard and sundaresan 11 with special emphasis on stochastic production and realtive price uncertainty

a positive theory of social security based on reputation we construct a general equilibrium model in which a pay as you go social security system can be adopted and sustained as a political and economic equilibrium we alalyze the welfare implictions of this system and compare general equilibrium welfare measure to the commonly used notion of actuarial fairness

the minimum variance hedge ratio under stochastic interest rates in an environment where interest rates are stochastic we examine the case of a pure hedger endowed with a fixed position in a long term bond in contrast to conventional wisdom according to which the difference between hedging through forward contracts and futures is immaterial it turns out that the minimum variance hedge ratio using forwards comprises two terms instead of one only when using futures the magnitude of the difference between the two hedge ratios may be important under some plausible assumptions this result is due to the presence of additional interest rate risk that bears on the profit and loss statement associated with the forward position this sheds some additional light on the respective features of forward and futures contracts written on interest rate sensitive securities

are contributions to public pension programmes a tax on employment many studies describe the potentially adverse impact on employment of the payroll costs of financing public pension programmes conventionally empirical studies treat contributions to public pension programmes as a pure tax in for example calculations of the tax wedge by oecd but this approach ignores any future rights to benefits that are perceived by contributors in fact public pension programmes contain both an actuarial and a redistributive component the former closer to saving the latter a tax the paper constructs indicators of the tax component of pension programmes both between and within generations across a range of oecd countries and time periods it uses these measures in a cross country panel analysis of the determinants of age and gender specific economic activity rates the results reveal robust evidence that when public pension programme contributions are broken down into a tax component and a savings component the tax component of the payroll contribution reduces economic activity rates among women while a higher retirement saving component has the opposite effect there is little evidence that average tax rates however constructed have any adverse impact on the economic activity rates of men richard disney

forward and futures contracts as preharvest commodity marketing instruments empirically significant differences between forward and futures contracts evidence their imperfect substitutability as preharvest marketing instruments certain combinations of market conditions make the two types of contracts complementary rather than interchangeable forwards and futures differ conceptually because of lumpiness marking to market and basis of these differences basis constitutes the most important factor although lumpiness may affect smaller producers it represents an inconsequential detail for larger traders in given years interest income cost resulting from futures margin requirements may reach important absolute amounts relative to size of basis and price changes this factor fails to attain a magnitude of practical significance

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

ageing and unused capacity in europe is there an early retirement trap we address the issue of how early retirement may interact with limited use of financial markets in producing financial hardship later in life when some risks such as long term care are not insured we argue that the presence of financially attractive early retirement schemes in a world of imperfect financial and insurance markets can lead to an early retirement trap indeed europe witnesses many early retired individuals in financial distress in our analysis we use data on 10 european countries which differ in their pension and welfare systems in prevailing retirement age and in households access to financial markets we find evidence that an early retirement trap exists particularly in some southern and central european countries people who retired early in life are more likely to be in financial hardship in the long run our analysis implies that governments should stop making early retirement attractive let retirees go back to work improve access to financial markets and make sure long term care problems are adequately insured viola angelini agar brugiavini and guglielmo weber

implicit delivery options and optimal delivery strategies for financial futures contracts abstract futures contract specification usually allow the short position some variation as to when where how much and what is to be delivered in this paper we derive the optimal delivery policy for the treasury bond futures contracts and find that our policy produces profits that are positive and statistically significant this indicates that future prices are too high in that the short position can earn profits by skillfully exercising his delivery options we find the actual delivery policies of market participants depart substantially from the optimal strategy the implications of these findings for futures traders and bond dealers are discussed

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

an equilibrium analysis of hedging with liquidity constraints speculation and government price subsidy in a commodity market we develop a simple commodity model to analyze i the effects of hedgying with liquidity constraints due to producers inability to bear unlimited trading losses ii the role of speculation in the process of risk allocation between consumers and producers and iii the equilibrium implications of government price subsidies to the producers we find that 1 liquidity constraints can cause futures prices to exhibit mean reversion which then makes speculation profitable 2 speculation tends to make futures price volatility an increasing function of futures price and 3 government price subsidy if actively hedged by the producers serves to lower the futures risk premium and reduce futures volatility commodity spot and futures prices are determined by the following types of market participants producers consumers speculators and governments producers have generally taken short futures positions in order to hedge against price declines consumers have generally taken long futures positions in order to hedge against price increases speculators who neither produce nor intend to consume the commodity are present in the spot and futures markets for the purpose of making a profit governments play significant roles in the markets by providing producers with various support programs and in some cases by directly intervening in the markets to affect commodity prices or adjust inventory levels the traditional approach to commodity futures pricing has been based on the theory of storage 1 as fama and french 1987 1988 show this approach to commodity pricing is particularly useful for explaining the basis movement as a function of inventory levels based on the hypothesis that the marginal convenience yield on inventory declines at a decreasing rate as

the time pattern of hedging and the volatility of futures prices the paper proposes a multi period model of hedging which allows for a futures position to be revised within the cash market holding period within this framework we assess the robustness of the two period theory of hedging when generalized to many periods we characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts mark to market daily finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices in the large literature on hedging in futures markets the principal analytical accounts of hedging are framed in a two trade date setting an agent commits himself now to a future purchase or sale of a good whose cash price later is uncertain this risk is hedged by purchase or sale of an appropriate number of futures contracts and holding this futures position until the cash transaction is realized in the present paper we formulate a multi period model of hedging which allows for the futures position to be revised within the cash market holding period the resulting analysis captures an important institutional reality that is absent in a two trade date model namely the fact that the day to day fluctuations of the futures price will generate a series of random cash flows over the period during which a futures position is held this is due to the requirement that futures accounts mark to market daily within this framework we address a number of issues first we assess the robustness of the two period theory of hedging when generalized to many periods second we characterize the normal time path of a hedge and contrast futures and forward contracts from the perspective of an individual hedger finally we show how the resolution of production uncertainty over time affects hedging behaviour and determines the volatility of futures prices while the literature on asset demand in a multiperiod setting is large futures markets are specifically treated in a limited number of studies grauer and litzenberger 1976 are concerned principally with characterizing the relation of spot and futures prices in a market for a storable periodically produced commodity they offer a rationale for positive stock holding in markets where spot price exceeds the futures price richard and sundaresan 1980 are also concerned primarily with characterizing price behaviour since they posit identical consumers in equilibrium individual holdings of futures are zero there is no hedging activity in the sense that we understand it breeden 1980b analyzes the optimal futures position sizes in a multiperiod setting his framework is more general than ours in that his is a multi good multi asset model where preferences

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

social network formation and labor market inequality abstract we study how differences in interpersonal skills lead to inequality among workers when social connections are endogenously formed and workers find jobs through their contacts we show that the equilibrium network structure is very unequal in terms of links and access to jobs the equilibrium network is not socially optimal because workers impose negative externality on each other by forming more links the degree of inequality is larger in the equilibrium than what would be socially optimal in the equilibrium high skilled individuals overinvest in networking while low skilled individuals underinvest which enlarges the impact of differences in interpersonal skills the degree of inequality is largest when job availability is moderate

the determinants of earnings a behavioral approach we survey the determinants of earnings and propose a framework for understanding labor market success we suggest that the advantages of the children of successful parents go considerably beyond the benefits of superior education the inheritance of wealth or the genetic inheritance of cognitive ability we suggest that noncognitive personality variables such as attitudes towards risk ability to adapt to new economic conditions hard work and the rate of time preference affect both earning and the transmission of economic status across generations

optimal portfolios of external debt in developing countries the potential role of commodity linked bonds much of the spectacular growth in external borrowing by developing countries during the 1970s was in the form of general obligation loans denominated in u s dollars at floating interest rates it is now well understood that this strategy involved substantial risks an unexpected deterioration in a country s terms of trade can quickly erode its ability to service large debts in turn this may induce restricted access to new external credit and a period of forced adjustment in domestic consumption and investment these risks have become all

why there are organized futures markets i shall present an explanation of the existence of organized futures markets with more predictive power than the two prevailing rival views my explanation briefly is this an organized futures market facilitates trade among strangers one of the rival prevailing views is a defense of futures trading it asserts that an organized futures market furnishes legitimate businessmen with a means of hedging so that they can obtain insurance against price risk the other prevailing view is an attack on organized futures markets it asserts that such markets enable speculators to manipulate prices to the detriment of outsiders who are less well informed and to the detriment of legitimate businessmen such as farmers the attack on organized futures markets likens them to gambling casinos the defense sees them as a form of insurance neither the attack nor the defense is valid the correct explanation is closely related to why we conduct trade using money instead of by barter

an equilibrium model of investment under uncertainty this paper analyzes the optimal investment decisions of heterogeneous rms in a competitive uncertain environment we characterize rms optimal investment strategy explicitly and derive a closed form solution for rm value we show that in the strategic equilibrium real option premia are signi cant as a result rms delay investment choosing optimally not to undertake some positive npv projects the model predicts that rm returns vary over the business cycle with returns negatively skewed during expansions but positively skewed in recessions

the futures price of a commodity in fixed supply abstract this letter shows that in a general equilibrium model of homogeneous population with production risk the futures price of a commodity which is in fixed supply is always below the expected futures spot price e g normal backwardation it also shows that the difference between the futures price and the expected spot price increases as the representative individual s risk aversion rises an important application of this model is to the housing market since houses are in fixed supply in the short run and buying a house is like holding a long position in a forward contract therefore if population is homogeneous houses are not a good consumption hedge and the prices of houses are below their expected rental prices

futures market backwardation under risk neutrality j m keynes first introduced the theory of normal backwardation in futures markets in the language of british commodities markets a backwardation is an excess of the spot price over futures prices as is well known keynes suggested that this might be explained as a risk premium less well known is that keynes actually proposed two distinct theories of backwardation of these two theories of backwardation the latter has recently received much attention the purpose of this paper is to formalize keynes first theory his liquid stocks theory with an eye to its eventual empirical test we follow the recent formalizations of the risk premium theory by assuming the existence of perfectly competitive asset markets to emphasize the differences between the two theories however we assume that there are well funded risk neutral investors thus risk premia cannot explain backwardation under our assumptions instead backwardations arise because of interactions between equilibrium in the commodities exchange both in spot and futures trading and the production consumption and storage decisions taken on the real side of the economy

quasi hyperbolic discounting and retirement abstract some people have self control problems regularly this paper adds endogenous retirement to laibson s quasi hyperbolic discounting savings model quarterly journal of economics 112 1997 443 477 earlier selves think that the deciding self tends to retire too early and may save less to induce later retirement still earlier selves may think the pre retirement self does this too much saving more to induce early retirement the consumption pattern may be different from that with exponential discounting other observational non equivalence includes the impact of changing mandatory retirement rules or work incentives on savings and a possibly negative marginal propensity to consume out of increased future earnings naive agents are briefly considered

the effects of personality traits on adult labor market outcomes evidence from siblings abstract while large literatures have shown that cognitive ability and schooling increases employment and wages an emerging literature examines the importance of so called non cognitive skills in producing labor market outcomes however this smaller literature has not typically used causal methods in estimating the results one source of heterogeneity that may play an important role in producing both personality and other non cognitive skills and labor market outcomes is family background including genetic endowments this paper is the first to use sibling differences to estimate the associations between personality on employment and wages and is also able to control for many other sources of heterogeneity including attractiveness cognitive ability schooling occupation and other factors overall the findings suggest that personality measures have important associations with labor market outcomes in adulthood and that the results vary considerably by demographic group the findings also highlight the potential role of extraversion in being associated with favorable labor market outcomes which has not been documented in many other studies

political economy of pension plans impact of institutions gender and culture abstract national pension systems are an important part of financial intermediation and worker welfare in most countries but how and why do they differ internationally controlling for important political economic and social institutions we document that international differences in pension progressivity or how pensions reflect lifetime earnings are negatively related to masculinity uncertainty avoidance individualism long term orientation employment rights average pension levels social trust and economic inequality we also find that pension progressivity is positively related to the economic and societal role of women the extent of catholicism as well as political voice and accountability these results provide important insights for both public policy and mnc managers

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

common factors and local factors implications for term structures and exchange rates this paper studies a multi factor two country term structure and exchange rate model when a diversification effect for an international bond portfolio is expected it shows that the diversification gain calls upon certain restrictions on the process of the stochastic discount factor in a factor structured economy existence of local factors is shown to be a necessary condition for the gains from investing in foreign bonds further the exchange rate risk premia are shown to be a function of the differentials of the risk premia of the factors in bond returns empirical results reveal the tendency for investors to respond sensitively to rare shocks which is shown to be a potential solution to the forward premium puzzle

taxation pension and saving in a small open economy an overlapping generations model of a small open economy is used to explore several policy options aimed at reducing the burden of income taxes and pay as you go payg contributions on labor income so as to improve the incentives to supply labor including the return of funded collective fc pension plans in the tax base turns out to be counterproductive cutting payg benefits in contrast succeeds in improving efficiency in general and labor market incentives in particular under specific variants of the fc plan reducing payg benefits even proves to be pareto welfare improving

social contacts and occupational choice social contacts help workers to find jobs but those jobs need not be in the occupations where workers are most productive hence social contacts can generate mismatch between a worker s occupational choice and his comparative productive advantage thus economies with dense social networks can exhibit apparently low labor force quality and as a result low returns to firms investment and depressed aggregate productivity we employ us and european data for the 1990 s to test the key prediction that social contacts distort workers occupational choices in a direction that reduces their apparent productivity we find that the use of social contacts helps find jobs one to two months sooner but leads to individual wage discounts of 5 to 7 and produces negative externalities on aggregate productivity

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

refraining from imitation professional resistance and limited diffusion in a financial market why do some practices not spread although this is an important question for both diffusion theorists and those interested in institutional change we know surprisingly little about the limitations on diffusion because most diffusion studies sample on successful diffusion i address the question of why some practices fail to spread by introducing the concept of a deviance discount a deviance discount is a systematic downgrading of the observed adoption performance of controversial practices which limits the contagion of such practices i test and find qualitative and quantitative support for my thesis in the product introduction behavior of swedish mutual fund firms my findings hold implications for diffusion theory and theories of endogenous institutional change

financial instruments for consumption smoothing by commodity dependent exporters given the substantial instability in all primary commodity markets one would expect countries that depend on a single primary export for most of their foreign earnings to experience especially sharp fluctuations in export earnings and their underlying wealth to the extent that these fluctuations affect consumption they are costly and we would expect such countries to seek ways of managing these fluctuations and reducing their costs in many countries the nature of the resource endowment and its comparative advantage rule out production diversification as a significant near term strategy and we assume it away here in addition we rule out diversification via exchange of equity investments with foreigners in this paper we consider the cost of export risk and show the potential contribution of commodity bonds in this context we show that in theory appropriate commodity bonds can in fact achieve optimal smoothing of i i d export price disturbances if that is what countries really want or need commodity bonds c bonds are bonds whose principal repayment and perhaps dividend payments may be made in units of physical commodity or the terminal value of some appropriate futures contract typically the bond buyer has the option to receive the nominal face value or the commodity bundle in the finance literature studies of the pricing of c bonds schwartz carr priovolos do not distinguish bonds issued by foreign governments from private corporate bond issues however the literature on foreign borrowing recognizes that the distinction is crucial sovereign borrowing and default prevention

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

on the contribution of economics to the evaluation and formation of social insurance policy if one had to choose a single policy that best characterizes the postwar behavior of governments it might well be their expansion of social insurance today s citizen of a typical developed country is insured through government programs against unemployment disability medical expenses impoverishment in youth and middle age through welfare systems impoverishment in old age through old age pensions loss of spousal support due to divorce through social security dependent benefits fluctuating earnings through progressive tax systems early death of a spouse via survivor s insurance and late death via annuity insurance the remarkable growth of social insurance has occurred against a backdrop of increased geographic mobility dramatic changes in demographics and at least in the united states a dissolution of the family the extent to which social insurance has been the cause of family decline and demographic change or its result is one of many complex questions that economics or any other social science is unlikely to ever fully answer economic analysis while not being able to discover the precise recipe leading to our social insurance institutions has at least been able to taste many of the key ingredients economics has and can provide real insight into a the need for social insurance programs b the appropriate size of such programs and c how social insurance programs affect the economy this paper seeks to illustrate each of these three kinds of economic contributions to the evaluation and formation of social insurance policy section i drawing on my 1987 article presents an efficiency argument for compulsory saving through a progressive social security system section ii drawing on my paper with avia spivak and laurence summers 1982 and on alan auerbach s and my 1987b paper illustrates an analysis of the appropriate size of social insurance programs examining in turn the questions of whether households save enough and buy enough life insurance or whether more government intervention in these matters is appropriate section iii drawing on my 1989 book illustrates how social insurance programs can affect the economy by discussing potential savings effects of health insurance particularly an asset tested medicaid scheme section iv concludes the paper with suggestions for future research and policy options as indicated the paper draws on my own and coauthored research and it provides only limited references for no better reason than easing my task and saving space in so doing i do not pretend to suggest that this is more than a very small subset of a huge volume of research sparked in the 1970s in large part by martin feldstein

conditional time varying interest rate risk premium evidence from the treasury bill futures market existing studies of the term structure of interest rates often use spot treasury rates to represent default free interest rates however part of the premium in treasury rates is compensation for the risk that short sellers may default since treasury bill futures are default free they provide cleaner data to estimate the interest rate risk premium the mean excess return in defaultfree treasury bill futures is zero this suggests that the interest rate risk premium could be economically negligible we find that although the mean unconditional premium is zero futures returns contain economically and statistically significant time varying conditional interest rate risk premiums the conditional premium depends significantly positively on its own conditional variance and its conditional covariance with the equity premium the conditional premium is large in the volatile 1979 82 period but small afterwards

the commitment value of funding pensions abstract this paper studies how funding public pensions can improve policy outcomes when short sighted governments cannot commit we focus on sustainable plans where optimal nonlinear pensions are not reneged on by sequential governments funding pensions is a commitment mechanism it implies lower contributions than does the second best policy which reduces temptation to over redistribute later and to misuse revealed private information funding may be preferable even if the population growth rate is higher than the rate of return on assets second best optimal policies are also more likely to be renegotiation proof under fully funded pensions

collateral free lending with risk contingent credit for agricultural development indemnifying loans against pulse crop price risk in india this article addresses the problem of collateral free lending in the context of agricultural development we investigate a viable alternative to traditional credit products through the development of risk contingent credit for operating loans and farm mortgages and apply the concept to agricultural loans for pulse crops in india risk contingent credit mitigates business and financial risk by reducing debt obligations depending on the embedded commodity options whose payoffs are linked with commodity price fluctuations we analyze daily commodity spot prices for pulse crops in india and show how risk contingent structured financial instruments can be priced in practice

compiling the actuarial balance for pay as you go pension systems is it better to use the hidden asset or the contribution asset the aim of this article is twofold to establish the connection between the contribution asset ca and the hidden asset ha and to determine whether using either of them to compile the actuarial balance ab sheet in the pay as you go payg pension system will provide a reliable solvency indicator with these aims in mind we develop a model based on those first put forward by settergren and mikula 2005 and boado penas et al 2008 to obtain the analytical properties of the ca and to confirm its soundness as a measure of the assets of a payg scheme our model also enables us to explore whether and to what extent the ha can be considered a second alternative measure of the assets for payg schemes the main theoretical finding is that despite their very different natures the ha and the ca may nearly coincide at the limit when the interest rate of the financial market approaches the growth of the covered wage bill from above but the ha supplies a solvency indicator which is not always consiste

seasonal patterns of futures hedging and the resolution of output uncertainty abstract optimal futures hedging is examined in a two good model with stochastic output and sequential information arrival a producer s optimal hedge depends on demand elasticity sensitivity of his output to weather his correlation with aggregate output and how rapidly his output uncertainty is resolved relative to other producers during different seasonal periods because regional output uncertainties are resolved at different times the optimal futures position of a grower will commonly reverse in direction during the crop year a producer with non stochastic output who faces price risk arising from demand shocks may remain unhedged or even maintain a long position

forward contracts and futures contracts abstract this paper provides a detailed discussion of the similarities and differences between forward contracts and futures contracts under frictionless markets and continuous trading simple arbitrage arguments are invoked to value forward contracts to relate forward prices and spot prices and to relate forward prices and futures prices we also argue that forward prices need not equal futures prices unless default free interest rates are deterministic

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

financial contracts and international lending abstract this paper examines alternative financial contracts for international lending i demonstrate that conventional loans can be pareto dominated by financial contracts explicitly incorporating characteristics of the borrower s product market i provide conditions under which commodity linked debt is desirable and determine when more complicated revenue linked loans are optimal i also demonstrate that the type of lending contract has important real effects on production decisions one result of this research is to demonstrate why equity based lending arrangements may have limited applicability

transition from a pay as you go to a fully funded pension system the case of differing individuals and intragenerational fairness abstract in recent contributions to the theory of public pension systems it was argued that a pareto improving transition from an established unfunded pension system to a funded one is possible this result is derived in an overlapping generations model with identical individuals in the present study an extended model with differing individuals of an intragenerationally fair unfunded pension scheme is introduced within this more realistic framework it is shown that in general a pareto improving transition to a funded system is not possible because any instrument applied to the financing of pensions in the transition phase involves intragenerational redistribution

endogenous job contact networks we use the uk quarterly labour force survey to document the presence of two phenomena first a positive correlation between unemployment rate and the proportion of job seekers who use social networks to nd jobs network use second a non monotone relation between unemployment rate and the proportion of recently employed workers who found their job through friends or relatives network productivity this second relation is positive for low levels of unemployment rate while it becomes negative for high levels of unemployment rate existing models of social networks and labor market generally assume that social networks are exogenous this assumption implies a negative correlation between unemployment rate and network productivity we develop a model where social networks are used to collect job oers but workers decide strategically how much to invest in their network we show that equilibrium job contact networks are dense and more productive in transmitting information when labor market turnover is moderate while they are less productive and segmented into clusters for either high or low turnover the equilibrium response of job contact networks to changes in labor market conditions is sucient to generate

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

lessons for an aging society the political sustainability of social security systems what is the future of social systems in oecd countries in our view the answer belongs to the realm of politics we evaluate how political constraints shape the social security system in six countries france germany italy spain the uk and the us under population aging two main aspects of the aging process are relevant to the analysis first the increase in the dependency ratio the ratio of retirees of workers reduces the average profitability of the unfunded social security system thereby inducing the agents to reduce the size of the system by substituting their claims towards future pensions with more private savings second an aging electorate leads to larger systems since it increases the relevance of pension spending on the policy makers agenda the overall assessment from our simulations is that the political aspect dominates in all countries albeit with some differences spain the fastest aging country faces the largest increase in the social security contribution rate when labor market considerations are introduced the political effect still dominates but it is less sizeable country specific characteristics not accounted for in our simulations such as the degree of redistribution in the pension system and the existence of family ties in the society may also matter our simulations deliver a strong policy implication an increase in the effective retirement age always decreases the size of the system chosen by the voters while often increasing its generosity finally delegation of pension policy to the ec may reduce political accountability and hence help to reform the systems

retirement pensions and ageing we study the effects of demographic shocks and changes in the pension system on the macroeconomic performance of an advanced small open economy facing a given world interest rate we construct an overlapping generations model which includes a realistic description of the mortality process individual agents choose their optimal retirement age taking into account the time and age profiles of wages taxes and the public pension system the early retirement provision in most pension systems acts as a trap inducing most workers to retire well before the normal retirement age simulations show that pension reform must be drastic for it to have any effects on the retirement behaviour of workers

institutional and individual investors saving for old age this paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the special issue this introductory article and the papers in the special issue contribute to the debate on how to support individuals in their savings commitments and investment decision making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry there are three main conclusions i individual investors are not ready for the role that has been assigned to them in the pension industry ii institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients and iii more effective regulation may be needed

quantifying the laffer curve on the continued activity tax in a dynastic framework it is argued that the tax on continued activity should be removed by implementing actuarially fair schemes however these schemes cannot fund the expected social security ss deficit this article proposes to give individuals a fraction of the actuarially fair incentives in the case of postponed retirement ss faces a trade off between giving enough incentives to make individuals delay retirement and giving little increase in pensions in order to help finance its expected deficit this trade off is captured by a laffer curve finally when the ss system aims to maximize welfare the optimal tax on postponed retirement is still strictly positive erratum vol 49 issue 4 1539

index futures arbitrage and the behavior of stock index futures prices this article examines intraday transaction datafor s p 500 stock indexfutures prices and the intraday quotes for the underlying index the data indicate that thefutures price changes are uncorrelated and that the variability of these price changes exceeds the variability ofprice changes in the s p 500 index this excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes which induces autocorrelation in the index changes we advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value that this mispricing increases on average with maturity and that it is path dependent evidence supporting these hypotheses is presented

commodity bonds and consumption risks this paper analyzes the economic role of commodity bonds by examining the nature of the demand for these securities i show that while commodity bonds protect against relative price changes they do so by introducing variability into the future real income stream this variability limits the desirability of using commodity bonds to provide price insurance for future consumption however this variability may allow commodity bonds to hedge risks to consumption caused by stochastic changes in income the analysis also suggests that it is this income insurance rather than price insurance that is important in hedging risks to future consumption in 1863 the confederate states of america csa took the unusual step of issuing bonds payable in bales of cotton in 1980 the sunshine mining company took the unusual step of issuing bonds payable in ounces of silver although the csa commodity bond offering proved to be of an isolated and rather shortlived nature recent developments suggest that commodity bond offerings like that of sunshine mining may become more commonplace for example both mexico and the british oil and gas corporation have issued petroleum bonds and the reagan administration has proposed issuing oil indexed bonds to finance the strategic oil reserve france has experimented with gold bonds as have several private companies commodity indexed debt also has appeared outside of organized bond markets shared appreciation mortgages for example represent a debt indexed to the price of housing even bank loans can be indexed to underlying commodities as evidenced by the oil indexed loans between japanese banks and the soviet union 2 such developments suggest that debts linked to a wide variety of commodity indices are certainly feasible this paper analyzes the economic role of commodity bonds by considering the nature of the demand for these securities because commodity bonds can hedge graduate school of management cornell university this paper has benefitted greatly from discussions with david easley seymour smidt and piet sercu i would also like to acknowledge the extremely valuable comments of an anomymous referee 1 for discussion of the reagan petroleum bond plan see a new plan to finance oil reserve new york times january 15 1981 devious device to trim a budget new york times february 6 1981 and building an oil reserve the thrifty way new york times february 16 1981 britain s oil bonds are discussed in oil bonds may not bring riches world business weekly october 27 1980 gold bonds are featured in gold indexed bond is costly for france new york times june 30 1980 hot seller bonds indexed to oil and gold business week august 3 1979 and sale of gold bonds in europe planned new york times january 28 1981 2 numerous articles on such indexed loans have appeared in the wall street journal see for example wsj february 15 1979 p 33 june 11 1979 p 18 august 15 1979 p 29 april 7 1980 p 7 april 8 1980 p 35 and may 14 1981 p 31

the financial stability of notional account pensions a number of european countries are reforming their pension benefit formulas by adopting notional accounts these accounts are used to determine individual benefits but pay as you go financing is retained this paper addresses the belief that by choosing adjustment rules cleverly notional accounts can provide automatic financial equilibrium in the short run if this were true it would be a valuable advantage in terms of insulating the government budget from demographic pressures while insulating the pension budget from fiscal pressures it is shown that notional account benefit formulas cannot provide automatic financial equilibrium in the short run the paper also suggests that if indexing rules are chosen in a particular way and shocks revert rapidly to a mean the pension institution may achieve financial stability in the long run however long run stability is unlikely to be valuable because political interference occurs in the short run

dynamic asset pricing with non redundant forwards abstract in an incomplete market in which non redundant forward contracts contribute to span the uncertainty some standard results of portfolio theory must be amended when the investment opportunity set is driven by k state variables a k 3 mutual fund separation theorem is obtained in lieu of merton s k 2 fund separation result the additional fund is a portfolio that hedges the interest rate risk brought about by the optimal portfolio strategy itself second the mean variance efficiency of the market portfolio of cash assets is neither a necessary nor a sufficient condition for the linear relationship between expected return and beta to hold third the pricing equation for a forward contract is shown to contain an extra term relative to that for a cash asset term we name strategy risk premium

wages and employment in a random social network with arbitrary degree distribution this discussion paper resulted in an article in the american economic review 2006 volume 96 issue 2 pages 270 274 empirical studies of labor markets show that social contacts are an important source of job related information ioannides and loury 2004 at the same time wage differences among workers may be explained only in part by differences in individual background characteristics such findings motivate our model in which differences in social connectedness among otherwise identical workers result in wage inequality and differences in unemployment rates the paper is related to theoretical contributions by calvo armengol and jackson 2004 and calvo armengol and zenou 2005 and builds on the pissarides 2000 model workers may hear about job openings directly from employers or through their social contacts we go further by introducing heterogeneity in the number of contacts each worker has with others i e in the workers degree we utilize results from the technical literature on random graphs with arbitrary degree distributions newman 2003a to account for a consequence of workers receiving information about job openings from their social contacts they compete with their social contacts other contacts for social networks with arbitrary degree distributions we show that people who are better connected receive a higher wage on average and face a lower unemployment rate numerical computations for the specific case in which connections follow a poisson distribution show that variability in connections can result in substantial variation in the above labor market outcomes this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

different approaches for dealing with social security he u s social security system is a government pension program financed by worker payroll taxes as workers pay in their payroll taxes they accumulate credits toward benefits in the language of pensions this is a defined benefit plan at any point in time one can project tax inflows and benefit outflows based on various economic and demographic assumptions and determine the long run actuarial soundness of the system or to put it another way determine whether the present set of tax and benefit schedules will be consistent in the long term every year such forecasts are made by the social security and medicare trustees now three cabinet officers the commissioner of social security and two outside members social security and medicare boards of trustees 1995 every four years a quadrennial advisory council is appointed to review these forecasts and to comment on relevant policy issues in the past many of these councils have had important impacts on social security policy for example the 1983 greenspan commission proposed a number of measures that saved the system from imminent financial difficulty and the 1975 council recommended changing procedures that had until then led to overindexation of social security for inflation another advisory council was formed in 1994 and i was asked to chair it it also included three members from business three from unions and six others from the private pension industry the self employment sector and independent

a comparison of forward and futures prices of an interest rate sensitive financial asset this paper focuses on contractual distinctions as an explanation for the price divergence between futures and forward contracts specifically it investigates the effect of marking to market on the observed price differences using the pricing model described in cox ingersoll and ross cir 1981 journal of financial economics 9 321 346 using previously unavailable data this paper employs eurodollars an interest rate sensitive financial asset to test the cir model unlike prior empirical studies test results support both the weak prediction concerning the sign of the average price difference and the stronger prediction that specific covariances explain the variation in the price differences futures contracts and forward contracts are fundamentally similar both contracts are agreements between two parties to trade a specific good or asset at a future date at a price determined today these agreements facilitate the transfer of risk between contracting parties permitting the creation of hedging strategies in spite of their conceptual similarity the implementation of these two contracts is quite different participants in futures markets trade highly standardized contracts by open outcry on organized exchanges clearing associations tor the exchanges control default risk by assuming the opposite side of each transaction guaranteeing payment to reduce traders incentive to default the exchanges mark positions to market by settling contract gains and losses daily in contrast to the futures market the market for forward contracts is mostly an over the counter market in the absence of a clearinghouse trader reputation helps control default risk unlike futures contracts no markingto market occurs the parties in the contract make no payments until maturity of the contract the forward market for financial interest rate instruments departs even further from the futures market format a trader can use the cash market for interest rate instruments to establish a forward position for example a trader can secure a forward position for a three month t bill beginning three months in the future by buying a t bill with a six month maturity and selling a t bill with a three month maturity

the effects of investing social security funds in the stock market when fixed costs prevent some households from holding stocks with fixed costs of participating in the stock market consumers with high income will participate in the stock market but consumers with lower income will not participate if a fully funded defined contribution social security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita consumers who save but do not participate in the stock market will increase their consumption thereby reducing saving and capital accumulation calibration of a general equilibrium model indicates that this policy could reduce the aggregate capital stock substantially by about 50 cents per capita

regulation regulatory lag and the use of futures markets this study explores the feasibility of using futures markets to mitigate the eroding effects of regulatory lag on a public utility s revenue stream by the very nature of the regulatory process shareholders of public utilities are exposed to substantial risks due to unanticipated economic fluctuations since the rates allowed by public utility commissions presumably reflect the anticipated costs of service at least in forward test year jurisdictions to the extent that the cash flow components which constitute a public utility s revenue requirements are not correctly anticipated and that new information affecting utility costs and revenues becomes mirrored in futures prices trading in futures markets can offset the unexpected changes in the costs of service despite the deleterious effects of regulatory lag on a utility s earnings no uniform policy exists to prevent the erosion of earnings due to unanticipated economic events and inevitable delays in processing applications for rate increases stopgap palliative measures have surfaced in some jurisdictions including emergency rate increases bonded rate increases adoption of transition loss allowances automatic adjustment mechanisms such as fuel adjustment clauses and adoption of a forward test year but none offers the same potential for the efficient risk bearing that futures markets offer the use of futures markets to alleviate regulatory lag offers a potential for lowering regulatory risk thereby reducing investor return requirements and hence output prices borne by consumers the paper is organized as follows section i presents a brief overview of the regulatory process and discusses the effect regulatory lag has on the public utility s revenues section ii develops strategies for hedging the expected revenue requirements against the effects of unanticipated price movements in several factor inputs specifically risk control techniques are explored for three inflation sensitive components of revenue requirements the cost of incremental debt labor costs and materials costs as section iii shows the use of futures markets by utilities themselves or as part of the rate setting process has consequences for issues of social welfare the use of futures markets in a regulated industry raises important questions of efficient risk bearing the allocation of gains and losses between firms and the public and managerial incentives finally section iv provides a summary of the paper s issues and findings

taxes and the pricing of stock index futures stock index futures prices are generally below the level predicted by simple arbitrage models this paper suggests that the discrepancy between the actual and predicted prices is caused by taxes capital gains and losses are not taxed until they are realized as constantinides demonstrates in a recent paper this gives stockholders a valuable timing option if the stock price drops the investor can pass part of the loss on to the government by selling the stock on the other hand if the stock price rises the investor can postpone the tax by not realizing the gain since this option is not available to stock index futures traders the futures prices will be lower than standard no tax models predict on 24 february 1982 the kansas city board of trade began trading futures contracts on the value line average stock index during the next two months both the chicago mercantile exchange and the new york futures exchange also initiated trading in stock index futures although these contracts are actively traded their prices have puzzled both practitioners and academics the observed

the intergenerational welfare state and the rise and fall of pay as you go pensions this article develops a theory of the two armed intergenerational welfare state consistent with key features of modern welfare arrangements and uses it to rationalise the rise and fall in generosity of pay as you go pensions solely on efficiency grounds by using the education arm a dynamically efficient welfare state is shown to improve upon long run laissez faire even when market failures are absent to release these downstream welfare gains without hurting any transitional generation help from the pension arm is needed in the presence of an intergenerational education externality pensions initially rise in generosity but can be replaced by fully funded pensions eventually

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

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

effects of insider trading disclosures on speculative activity and future prices this paper explores a simple model of the effects of requiring a public disclosure of insider trader activity in future markets

reallocating risks and returns to scale up adoption of distributed electricity resources abstract deployment of distributed electricity resources requires bringing together assets that belong to diverse and geographically diffuse owners using the example of distributed solar pv we analyze the schemes used to encourage induce owners of distributed assets to make them available for electricity generation the dominant model in the u s is long term power purchase agreements ppa offered to owners consumers by solar developers we show that these agreements mis allocate the electricity price risk to owners consumers and impose limitations on the scale up of distributed solar by proper use of financial markets it is possible to shift the electricity price risk from owners consumers to parties that are better positioned to manage it the proposed contracts simplify the adoption decision for owners consumers and can lead to a wider adoption removing barriers to scale up requires i eliminating the tight coupling between consumers and owners and ii rewarding the owners unambiguously for the assets they provide these necessitate the transformation of the current intermediary firms into full fledged distributed generators we discuss the implications of such a transformation and argue that the broad outline of our analysis can be used to assess scale up schemes in other domains of distributed electricity resources as well

formal and informal job search i develop a model where workers decide how hard to look for a job via formal and informal search channels the intensity of formal search determines an individual s arrival rate of offers the strength of investment in informal search translates into a job contact network in which job offers are transmitted there are two equilibria one with high formal search and one with high informal search the former pareto dominates the latter

determinants of hedging and risk premia in commodity futures markets this paper examines the determinants of commodity futures hedging and of risk premia arising from covariation of the futures price with stock market returns and with the reve nues of producers owing to supply shocks that stochastically redistribute real wealth surplus between producers and consumers and to limited participation in the futures market the total risk premium in the model is not proportional to the contract s covariance with aggregate consumption stock market variability interacts with the incentive to hedge causing the producer hedging component of the risk premium to increase de crease with income elasticity for a normal inferior good production costs that depend on output raise the premium we argue that output and demand shocks will typically be positively correlated raising the premium high supply elasticity reduces the absolute heding premium by reducing the variability of spot price and revenue

voting over type and generosity of a pension system when some individuals are myopic this paper studies the determination through majority voting of a pension scheme when society consists of far sighted and myopic individuals all individuals have the same basic preferences but myopics tend to adopt a short term view instant gratification when dealing with retirement saving and labor supply consequently they will find themselves with low consumption after retirement and regret their insufficient savings decisions henceforth when voting they tend to commit themselves into forced saving we consider a pension scheme that is characterized by two parameters the payroll tax rate that determines the size or generosity of the system and the bismarckian factor that determines its redistributiveness individuals vote sequentially we examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system our main result is that a flat pension system is always chosen when all individuals are of one kind all far sighted or all myopic while a less redistributive system may be chosen if society is composed of both myopic and far sighted agents furthermore while myopic individuals tend to prefer larger payroll taxes than their far sighted counterparts the generosity of the system does not always increase with the proportion of myopics

immigration and pension benefits in the host country this paper examines the role that low skilled immigration plays in determining pension benefits of the host population with an overlapping generations model which allows identifying which groups of native population are in favour or against immigration we find that despite immigrants having low average productivity an open borders policy would be implemented since most of current domestic cohorts gain from immigration only younger workers might be against immigration since they will coincide with immigrants in their retirement periods moreover we show how a larger immigrant quota would increase the probability of a pareto improvement for the current domestic population