Nonseparable Preferences and Optimal Social Security Systems

Borys Grochulski and Narayana Kocherlakota

No 13362, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. We show that such nonseparabilities imply that optimal asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.

JEL-codes: E60 H21 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-mac and nep-pub
Note: EFG PE
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Citations: View citations in EconPapers (8)

Published as Grochulski, Borys & Kocherlakota, Narayana, 2010. "Nonseparable preferences and optimal social security systems," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2055-2077, November.

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Related works:
Journal Article: Nonseparable preferences and optimal social security systems (2010)
Working Paper: Nonseparable Preferences and Optimal Social Security Systems (2008)
Working Paper: Nonseparable Preferences and Optimal Social Security Systems (2007)
Working Paper: Nonseparable Preferences and Optimal Social Security systems (2007)
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