RETIREMENT WEALTH AND LIFETIME EARNINGS*

This article argues that a satisfactory theory of wealth inequality should account not only for the marginal distribution of wealth, but also for the joint distribution of wealth and earnings. The article describes the joint distribution of retirement wealth and lifetime earnings in the Panel Study of Income Dynamics. It then evaluates the ability of a stochastic life‐cycle model to account for key features of this distribution. The life‐cycle model fails to account for three key features of the data. (1) The correlation between lifetime earnings and retirement wealth is too high. (2) The wealth gaps between earnings rich and earnings poor households are too large. (3) Wealth inequality among households with similar lifetime earnings is too small. Models in which households differ in rates of return or time preferences account much better for the joint distribution of retirement wealth and lifetime earnings.     

THE TREND IN RETIREMENT*

A model with leisure production and endogenous retirement is used to explain declining labor force participation rates of elderly males. The model is calibrated to cross‐sectional data on labor force participation rates of U.S. males by age, their drop in consumption, and leisure good expenditure share in 2000. Running the calibrated model for the period 1850–2000, a prediction of the evolution of the cross‐section is obtained. The model accounts for more than 87% of the increase in retirement of men over 65. The increase in retirement is driven by rising wages and falling prices of leisure goods.     

RISKY PRODUCTION WITH EX-ANTE PRICES UNDER MONOPOLY ANALYTICAL AND SIMULATION RESULTS

This paper concerns the case of a monopolist facing multiplicative uncertainty in demand. Karlin and Carr (1962), henceforth KC, show that, when price and production are both chosen ex ante , the uncertainty price exceeds the certainty price. They also give a sufficient condition under which the firm locates above the certainty demand curve, but they do not consider the effect on the output level. In this note we replicate the KC results and then go further. In the special case that the price elasticity of certainty demand is constant, and the probability distribution for the uncertainty parameter in the demand function is uniform, output is unambiguously lower under uncertainty, and KC's condition for the firm to locate above the certainty demand curve can be strengthened to one that is both necessary and sufficient. The robustness of these results is tested under less stringent assumptions on demand, abandoning symmetry for a lognormal distribution of the uncertainty parameter. Simulation confirms that the results hold up, and also determines the effects upon the firm's decisions of an increase in demand uncertainty.     

STRATEGY PROOF AND PRIVACY PRESERVING FAIR ALLOCATION MECHANISM*

We study a fair division problem with indivisible objects such as jobs, houses and one divisible good like money. It is required that each agent be assigned with exactly one object and a certain amount of money. Agents are assumed to have quasi‐linear utilities in money but their reservation values over the objects are private information. A dynamic mechanism is proposed that induces all agents to act honestly rather than strategically and assigns the objects with money to agents efficiently and fairly; at the same time it achieves privacy protection for the agents.     

A COMOMENT CRITERION FOR THE CHOICE OF RISKY INVESTMENT BY FIRMS*

This article uses Taylor series expansions and the assumption of small risks to derive a comoment criterion that firms should maximize so that the resulting equilibrium is Pareto optimal. This is done in two models of production under uncertainty: the state‐of‐nature model in which the firms’ outputs depend on states of nature and financial markets are complete with respect to these states of nature and the probability model in which the firms’ risky outputs are modeled by their joint probabilities and financial markets span the outcome space of the firms. The comoment criterion provides a unifying framework for the two equilibrium models of production under uncertainty, has the merit of being based on information which is readily available to firms, and provides greater insight than the theoretical criterion into the risk characteristics of its profit stream that a firm should focus on when choosing its investment plan.     

INCOME DISTRIBUTION ISSUES VIEWED IN A LIFETIME INCOME PERSPECTIVE*

In the June 1977 issue of the American Economic Review extraordinary attention was given to the statistical problem of measuring the effect on inequality in current income arising from differences associated with age. The method adopted by Paglin was severely criticized although everyone recognized the value of Paglin's unusual, if not original, emphasis on the importance of the underlying issue. This paper is not primarily concerned with the statistical problem of correcting data on current income distributions for income-age differences. It is concerned mainly with the lifetime income perspective itself-with ways of viewing the long-term path of persons and of ways of viewing inequalities in that path as they develop within and among different generations. The paper discusses issues of measurement on a birth-cohort or longitudinal basis, recent trends for selected cohorts, intra-and inter-cohort variances in lifetime income, and various policy issues, for example, the equity of the U.S. Social Security System viewed on a lifetime dimension.     

RISKY VERSUS RISKLESS BARGAINING PROCEDURES: THE AUMANN‐ROTH CONTROVERSY REVISITED*

In a series of papers, Aumann and Roth discussed a game in which players can cooperate in pairs and two of them prefer to form a coalition with each other. Roth argued that the only rational outcome is that the players who prefer each other form a coalition; Aumann argued that all three coalitions are possible because the players have a problem of expectation coordination. A non‐cooperative analysis provides additional support for Aumann's arguments and shows that the difference between Aumann's and Roth's views can be traced back to a difference (risky versus/riskless) in the bargaining procedure.     

SOCIAL SECURITY AND THE INTRAGENERATIONAL REDISTRIBUTION OF LIFETIME INCOME IN JAPAN*

We investigate how social security redistributes lifetime income within the same generation in Japan, based on data from the micro data. The progressivity of Japan's state pension programme appears to be much more limited on a lifetime basis than on an annual basis. Given an ageing population, replacing the current Pay As You Go system with a simple one that consists of a flat benefit and a wage‐proportional premium, and has no maximum contribution, can be desirable in terms of both efficiency and intragenerational equity. The redistributive effects of income tax and consumption tax to finance the benefit are also examined.     

RETIREMENT INCOME RIGHTS AS A COMPONENT OF WEALTH IN THE UNITED STATES*

Americans have accumulated a considerable amount of future purchasing power in the form of Social Security and employer pension rights. These rights are a form of wealth. In this paper, we ask how their inclusion alters the wealth portfolios of a sample of Americans at or nearing normal retirement age. Data from the 1973 wave of the longitudinal Retirement History Study suggest that, for many Americans, retirement income rights are the dominant component of wealth, and are often more important than all other entries combined, including home equity. We also find that this wealth can be seriously eroded during times of high inflation. Because of differences in marketability, pension and Social Security rights are not perfect substitutes for more liquid assets. Nonetheless, since they are so large in magnitude, and have been shown to be key determinants of the behavior of older workers, they should not be ignored.     

HOW FAIR IS FAIR TRADE?

Fair trade, also known as resale price maintenance (RPM), is a per se violation of the antitrust laws. Economic theory suggests that RPM may enhance the efficiency of distribution, but opposition to the practice remains strong. This opposition may stem from concern that RPM raises retail prices and penalizes well-informed customers. This paper summarizes research on the motivation for RPM as well as its impact on prices. The analysis suggests that comparing prices in RPM jurisdictions with those in free-trade areas provides little guidance on likely effects if RPM were permitted everywhere. An analysis of RPM's impact on prices is developed, and then this analysis is employed to assess RPM's welfare effects. Results of the welfare analysis are shown to depend crucially on which form of cost function is assumed for services provided by dealers.     

PRODUCT QUALITY UNDER TWO-PRONGED UNCERTAINTY*

This paper builds on a model by Mikami (1991) to explore the effects of uncertainty on the producer's choice of product quality when (1) quality influences demand price and (2) producers are not risk takers. It is shown that even risk-neutral producers might make different quality choices under uncertainty and that those choices will depend upon the explicit way in which uncertainty influences the demand price.     

FACTOR-INTENSITY REVERSALS UNDER MONOPOLISTIC COMPETITION*

This paper shows that it is impossible to rule out factor-intensity reversals (FIRs) under monopolistic competition unless production functions are homothetic. We construct a simple example where the capital-intensity at unchanged output is fixed, but where FIRs still can occur because equilibrium output and thus the average capital-intensity depends on the wage-rental ratio.     

ECONOMIC DEVELOPMENT UNDER ALTERNATIVE TRADE REGIMES*

How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade and (ii) a full liberalization of trade. The first change decreases the cross‐sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.     

HOME EQUITY IN RETIREMENT

Retired homeowners dissave more slowly than renters, which suggests that homeownership affects retirees' saving decisions. We investigate empirically and theoretically the life-cycle patterns of homeownership, housing, and nonhousing assets in retirement. Using an estimated structural model of saving and housing decisions, we find first that homeowners dissave slowly because they prefer to stay in their house as long as possible but cannot easily borrow against it. Second, the 1996–2006 housing boom significantly increased homeowners' assets. These channels are quantitatively significant; without considering homeownership, retirees' net worth would be 28%–44% lower, depending on age.