On the redistributive power of pensions

Philippe Choné and Guy Laroque

Social Choice and Welfare, 2018, vol. 50, issue 3, No 5, 519-546

Abstract: Abstract We study the tradeoff between efficiency and redistribution in a model with overlapping generations, extensive labor supply, and perfect financial markets. The government instruments are a pension scheme and a age-independent nonlinear income tax schedule. At the second-best optimum, the pension system constrains the agents’ labor supply behavior, forcing them to work to achieve a required lifetime performance. Income taxes affect labor supply directly, but also indirectly through pension incentives. The indirect effect of taxes counteracts the usual forces in the efficiency-redistribution tradeoff: through the interplay with the pension system, decreasing taxes induces redistribution and reduces productive efficiency.

Date: 2018
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DOI: 10.1007/s00355-017-1094-0

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