Pension reform, assets returns and wealth distribution

Falilou Fall

Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1)

Abstract: In OLG framework, it is generally admitted that PAYG pension system generates a lower capital accumulation, a higher level of interest rate but is more inequality reducing. By taking into account different assets returns and unequal access to them, we find that the PAYG pension system generates lower level of interest rate and increases wealth inequality. By using Matsuyama's (2000) technology that generates dynamic endogenous inequality, we represent the bequest and saving behaviour of the agents in an OLG model. This allows us to characterize the optimal investment choice of agents across two assets as a function of their initial endowment and a unique inheritance threshold depending on the equilibrium interest rate. This inheritance threshold divides the population into two categories : the rich-borrowers and the poor-lenders. In this context, we find that, the effect of increasing the contribution rate to the pension system is to increase inequality. Indeed, it increases the number of constrained agents and decreases the equilibrium interest rate. More the initial wealth distribution is egalitarian, more these effects are amplified. As the interest rate is the lending rate of poor-constrained agents, they lose from the reform while unconstrained-rich agents benefit from the reform since the decrease of the interest rate increases the net return of their investment. Unconstrained-rich agents benefit from the reform at the expense of constrained-poor agents

Keywords: Pension reform; inequality; incomplete markets; savings; wealth distribution (search for similar items in EconPapers)
JEL-codes: D31 D52 D91 H24 H55 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2004-03
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Pension Reforms, Assets Returns and Wealth Distribution (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:wpsorb:v04033

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