ROOSEVELT AND PRESCOTT COME TO AN AGREEMENT

Frank Caliendo and Nick Guo ()

Macroeconomic Dynamics, 2014, vol. 18, issue 6, 1383-1402

Abstract: Edward C. Prescott has argued that mandatory saving is socially desirable because it solves the problem of people intentionally free riding and becoming a welfare burden. Inspired by Prescott's argument, we develop a model in which rational individuals choose between saving and free riding. We find that free riding is a robust outcome for a significant share of the population and that everyone, including the free riders, benefits from the elimination of free riding through mandatory saving. Our results strengthen Prescott's position that free riding is a serious problem and that mandatory saving is socially desirable.

Date: 2014
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