Nonseparable preferences and optimal social security systems

Borys Grochulski and Narayana Kocherlakota

Journal of Economic Theory, 2010, vol. 145, issue 6, 2055-2077

Abstract: In this paper, we consider economies in which agents are privately informed about their skills, which evolve 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. In this environment, we derive a generalized version of the Inverse Euler Equation and use it to show that intertemporal wedges characterizing optimal allocations of consumption can be strictly negative. We also show that preference nonseparabilities imply that optimal differentiable 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.

Keywords: Private; skill; shocks; Nonseparable; preferences; Retrospecitive; taxation; Social; security; systems (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022-0531(10)00029-3
Full text for ScienceDirect subscribers only

Related works:
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)
Working Paper: Nonseparable Preferences and Optimal Social Security Systems (2007)
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:jetheo:v:145:y:2010:i:6:p:2055-2077

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().