Disability insurance in an optimal pension scheme

Disability or poor health is traditionally associated with a complete loss of earnings capacity and/or prohibitive increases in the disutility of labor. Thus, it invokes a necessity to withdraw from the labor market. A number of empirical and theoretical studies have questioned this conventional view and suggested instead that the use of disability-contingent allowances for early retirement mainly reflects the leniency of the eligibility rules. This raises the issue of designing incentive-compatible health-contingent retirement rules and questions concerning the resulting characterization of optimal pension systems. The study shows that the presence of moral hazard induces an overinsurance of normal retirees, raises the optimal contribution-rate, and lowers the optimal normal benefit level and the normal retirement age. Moreover, even if the realization of an ex-ante uncertain health shock increases the disutility of labor only slightly, the disability-contingent retirement age and the date when this health shock occurs will coincide — given that the system entails normal retirement provisions as well. Thus, minimum eligibility ages and other arrangements to induce prolonged work of actually disabled persons can very generally be demonstrated to be suboptimal.     

On the design of optimal grandfathering schemes for emission allowances

This paper derives optimal schemes for the free allocation of emission allowances in a dynamic context. We consider emissions- and output-based allocation rules which allow for updating of the basis of allocation over time and thereby do not rely on historical data only. We show that such dynamic schemes do not necessarily induce inefficient outcomes. In closed trading systems with an absolute cap on emissions, grandfathering schemes which allocate allowances proportionally to past emissions are first-best. However, in open trading systems where allowances can be traded with outsiders, first-best allocation schemes must not depend on firm-specific decisions while second-best schemes correspond to a Ramsey rule of optimal tax differentiation and are generally based on both past emission and output levels.     

On the optimal design of insurance contracts with the restriction of equity risk

This paper focuses on the optimal design of insurance contracts with the restriction of equity risk by Arrow's optimal insurance model [2] and Zhou's optimal insurance model [4]. The insured aims to maximize his/her expected utility of terminal wealth, under the constraint that the insurer wishes to control his/her risk. We establish an optimal insurance model that restrains underwriting risk and investment risk simultaneously. We solve this problem and obtain the results which improve and extend the results given by Arrow [2] and Zhou [4].     

Risk sharing and transition costs in the reform of pension systems in Europe

Unfunded pay-as-you-go state pension schemes are financially unsustainable in Europe as elsewhere. Proponents of reform argue that, by switching to a fully funded scheme that takes advantage of the high return on assets such as equities, the solvency of the state scheme could be restored at little or no financial burden to current taxpayers. We show that this is mistaken for two reasons.
First, making the transition is itself costly. Unless this cost is substantially financed by debt, it will fall on current generations, who are therefore likely to oppose the reform. Second, potentially higher returns are accompanied by significantly higher risk, which we quantify. We explain how an insurance scheme could be designed to mitigate both risk and moral hazard.     

On optimal control of income generating activities, and the value of flexible production design

The paper provides a closed form solution for the value of a firm which costlessly can change its mode of operation between two activities. The technology is such that production is zero from the inactive production line. In addition we assume that the production potential on any production line is idle when not operated, else the production follows a geometric Brownian motion. Although this framework is rather general, it is motivated by the problem to produce a natural resource located in two separate wells/ores, using a single (flexible) production unit. For what seems to be reasonable parameter values, the flexible unit is seen to achieve a surprisingly large value relative to the value achievable by a comprehensive unit, producing both alternatives simultaneously. In addition it is interesting to note that switching might occur even if the active production line gives the highest immediate income.     

On optimal unemployment

Some unemployment may be optimal in all states of nature for certain production and utility parameters and firm-provided insurance. For other specifications, uniformly varying hours for all workers is optimal.     

On the optimal exploitation of interacting resources

The paper demonstrates — partly analytically and partly numerically — that traditional results in resource economics obtained from the study of only one resource do not carry over to ecologically interacting resources. As in the traditional approach, we also employ dynamic optimization. The limiting behavior of the trajectories is first studied analytically by letting the discount rate approach infinity. A numerical study is then undertaken by means of a dynamic programming algorithm in order to explore the fate of the resources for various finite discount rates. The relation of our results to results in optimal growth theory is also discussed.     

On the optimality of optimal income taxation

The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (2009) [12] that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty?s critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system.     

The role of optimal threats in auction design

This paper studies revenue-maximizing auctions when buyers' outside options depend on their private information and are endogenously chosen by the seller. We show that the revenue-maximizing assignment of the object can depend crucially on the outside options that the seller can choose as threats. Depending on the shape of outside options, sometimes an optimal mechanism allocates the object in an ex-post efficient way, and, other times, buyers obtain the object more often than is efficient.     

On optimal community formations

It is shown that in an economy of identical individuals in which there are two communities with identical ex-ante features, optimal resource allocation may require to form communities of different size. This allocation cannot be supported without federal coordination, except for one special case.     

Demographics and the pension system

"Italian demographic evolution closely resembles that of the other leading European countries, although with some distinctive features, such as a lower birth rate, more rapid population aging and fewer immigrants. Projections for the next two or three decades point to accelerating expansion of the aged population, especially of the very old, and a contraction of the working age population after the turn of the century. However, there are also unknowns involved in the demographic evolution of the aged population, turning on the speed of the decline in senile mortality in the decades to come and the possible effects on the health of the elderly population, hence on the demand for social services, considering among other things changing family patterns. There is broad agreement that the birth rate is now too low, that this could have serious long-run repercussions on relations between generations and on intergenerational transfers, and that there is room for social policy action to influence the reproductive choices of couples. This article examines several possible reproductive models and discusses the foundations for action and the potential policy contradictions."     

Nonseparable preferences and optimal social security systems

In this paper, we consider economies in which agents are privately informed about their skills, which evolve stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. In this environment, we derive a generalized version of the Inverse Euler Equation and use it to show that intertemporal wedges characterizing optimal allocations of consumption can be strictly negative. We also show that preference nonseparabilities imply that optimal differentiable asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.     

Politically stable pay-as-you-go pension systems: When the social-insurance budget is too small in a democracy

The essay analyzes in an overlapping-generations model, to which extent a pay-as-you-go pension system will be the outcome of majority voting, given specific institutional set-ups. Clearly, the vote of an active person depends on his expectations about how the present decision (i.e., his contribution) is linked to the future (i.e., his benefits), when he will be retired. In the paper we employ the assumption of a basic social contract where each active voter's future benefits are positively related to his contributions. It is shown that in this framework a steady-state with a positive (though lower than optimal) level of the pension system exists, even if a new majority decision about the system takes place every period.     

On methods of optimal portfolio construction

The transition from a centrally planned economy to a market economy in Poland has caused dynamic changes in the number and structure of potential investors of the stock exchange market. This phenomenon, unknown in the past, needs a new approach to statistical methods of stock market analysis. The paper presents two methods of optimal portfolio construction. The first one leads to the square programming problem. Applying the Lagrange multipliers, we obtain a system of algebraic equations which can be solved by the special algorithm proposed in the paper. The second method reduces the mentioned above square program to the linear programming problem which can be solved using the simplex method.     

On the optimal distribution of traffic of network airlines

Network airlines have increasingly focused their operations on hub airports through the exploitation of connecting traffic. However, in this paper we show that they may also have incentives to divert traffic away from their hubs. More precisely, we examine how the optimal distribution of traffic of network carriers can be affected by the two major recent innovations in the airline industry: the regional jet technology and the low-cost business model. On the one hand, we show that a network airline may find it profitable to serve thin point-to-point routes with regional jets when the distance between endpoints is sufficiently short and there is a high proportion of business travelers. On the other hand, we observe that a network airline may be interested in serving thin point-to-point routes by means of a low-cost subsidiary when the distance between endpoints is longer and there is a high proportion of leisure travelers. We conclude that network airlines are using those innovations to provide services on thin routes out of the hubs.     

On the optimal distribution of income and educational expenditure

This paper extends the work of Arrow and Bruno on the optimal distribution of educational expenditure. It examines educational policies when both education and income redistribution policies are simultaneously optimised. The analysis is undertaken for both fixed and variable labour supply. It is shown that these modifications lead to more regressive educational policies than suggested by Arrow and Bruno.