Temptation and social security in a dynastic framework

Cagri Kumru and Chung Tran

European Economic Review, 2012, vol. 56, issue 7, 1422-1445

Abstract: We investigate welfare and aggregate implications of a pay-as-you-go (PAYG) social security system in a dynastic framework in which individuals have self-control problems. The presence of self-control problems induces individuals to save less because of their urge for temptation towards current consumption. Individuals' efforts to balance between the short-term urge for temptation and the long-term commitment for consumption smoothing result in self-control costs. In this environment PAYG social security works as a self-control cost reducing device. In contrast, the presence of altruism induces individuals to save more. This in turn mitigates the adverse effects of self-control problems and PAYG social security on savings but magnifies the self-control costs. We find that in our environment the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporate altruism and self control issues separately. However, the level of mitigation is quite modest.

Keywords: Temptation; Self-control preferences; Altruism; Social security; Dynamic general equilibrium; Overlapping generations; Welfare (search for similar items in EconPapers)
JEL-codes: E21 E62 H55 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292112001079
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:56:y:2012:i:7:p:1422-1445

DOI: 10.1016/j.euroecorev.2012.07.006

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().