Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists

James Pesando

Economic Inquiry, 1987, vol. 25, issue 2, 215-38

Abstract: In analyzing corporate pension plans, financial economists typically invoke the spot model of the labor market, where the worker's cash wage plus accruing pension benefit equals the value of his marginal product each period. This paper provides evidence again st the empirical validity of this model, using provisions common to m ost pension plans. Incentive effects, ruled out by the spot model, ma y help explain certain well known "puzzles," such as the failure of employers to fully fund their plans despite the tax advantages of do ing so. Copyright 1987 by Oxford University Press.

Date: 1987
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