Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints

Juan Rojas and Carlos Urrutia ()

No 409, Working Papers from Centro de Investigacion Economica, ITAM

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 exogenous 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.

Pages: 31 pages
Date: 2004-10
New Economics Papers: this item is included in nep-dge, nep-fmk, nep-pbe and nep-pub
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Citations: View citations in EconPapers (8)

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http://ftp.itam.mx/pub/academico/inves/urrutia/04-09.pdf First version, 2004 (application/pdf)

Related works:
Working Paper: Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints (2006)
Working Paper: Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:0409

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