The political economy of intra- and intergenerational redistribution with asymmetric information

Oliver Lorz

No 904, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: In this paper redistribution policy is analyzed in a 2-period overlapping generations model with heterogeneous individuals and asymmetric information between the government and the private sector. Individuals of the same generation differ with respect to their labor productivity. In each period, the respective government decides not only about the distribution of consumption between the working generation and the retired but also about the distribution within generations - between individuals with a high and with a low productivity of labor. The government in period 1 is not able to determine the policy of the subsequent government in period 2. In the political equilibrium, consumption of high- and low-productivity individuals is inefficiently allocated over their life cycle. For a given level of aggregate savings, a Pareto-improvement would be achieved, if high-productivity individuals consumed less during their working life and more during retirement in the following period, whereas low-productivity individuals had to consume more during their working life and less during retirement. In addition to this inefficiency, the government in period 1 may choose an inefficient level of aggregate savings in the equilibrium. It is shown for a specific example that an increase in aggregate savings would be Pareto-improving.

Keywords: Overlapping generations; redistribution; political economy; asymmetric information (search for similar items in EconPapers)
JEL-codes: D78 D82 E62 (search for similar items in EconPapers)
Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:904

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