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Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints

Juan Rojas () and Carlos Urrutia ()

No 602, Working Papers from Banco de España, Working Papers Homepage

Abstract: We study the aggregate effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the borrowing constraint in the unique asset is endogenously determined by the agents' incentives to default on previous debts. We find that a model with fixed borrowing constraints overestimates the positive effect of reforming social security on the capital stock and the saving rate, compared to our model with endogenous borrowing limit. The reason is that, in the latter, the size of precautionary savings is smaller because after the reform the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits. Adding retirement accounts to the basic model does not change these conclusions, although the quantitative importance of endogenizing borrowing constraints is reduced.

Keywords: social security; borrowing constraints; retirement accounts (search for similar items in EconPapers)
JEL-codes: E6 G23 H55 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2006-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/06/Fic/dt0602e.pdf First version, February 2006 (application/pdf)

Related works:
Working Paper: Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints (2004) Downloads
Working Paper: Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints (2004) Downloads
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