Unfunded Social Security in the OLG Model with an Imperfectly Competitive Finance Market

Mark A. Roberts

No 98-09, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: Unfunded pay-as-you-go social security policy is considered in the Diamond OLG model where the structure of the finance market is characterized by a finite number of finance firms engaged in Cournot competition in both the loan and deposit markets. There is a stronger case for it, since monopolistic behaviour in the loans market and monopsonistic behaviour in the deposit market will reduce the private rate of return on savings below the marginal efficiency of capital. Moreover, a non-negativity constraint on nominal interest rates may under imperfect competition constrain the real rate of return on savings, generating additional kinds of equilibria, which have implications for policy.

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