Dynamic Inconsistency in Pension Fund Management

Chiaki Hara () and Kenjiro Hirata ()
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Chiaki Hara: Professor, Institute of Economic Research, Kyoto University
Kenjiro Hirata: Lecturer, Faculty of Economics, Kobe International University

No 916, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We formulate the pension fund's problem of choosing optimal pension schemes in an inflnite, discrete-time setting as a sequence of Nash bargaining problems in which the members (contributors) of the fund are the bargainers and the disagreement points are determined by the utility levels they can attain by quitting and receiving lump-sum payments from the fund. We show that if the members are heterogeneous in their subjective time discount rates, then the sequence of the Nash bargaining solutions, obtained at each point in time, leads to an inefficient allocation of consumption processes, thereby indicating a source of dynamic inconsistency in pension fund management. Based on a set of micro data, we show the welfare loss of dynamic inconsistency can be as high as 14% of the members' total wealth, and the dynamically inconsistent choices of pension schemes tend to favor myopic members.

Pages: 36pages
Date: 2015-03
New Economics Papers: this item is included in nep-age and nep-mfd
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