The political economy of environmental and social security policies: the role of environmental lobbying

Social security provides retirement benefits to the old at the expense of the working young, while environmental investment benefits the future of the young at the expense of the old. This paper presents a model incorporating this intergenerational conflict on public spending and considers the political determination of environmental investment and social security by focusing on the Markovian political equilibria. It is shown that (1) the political equilibria are generally inefficient, and (2) the introduction of environmental lobbying into politics may improve environmental quality but degrade lifetime utility in the long run.      

Recursive equilibrium in stochastic OLG economies: Incomplete markets

We prove generic existence of recursive equilibrium for overlapping generations economies with uncertainty and incomplete financial markets. Generic here means in a residual set of utilities and endowments. The result holds provided there is sufficient intragenerational household heterogeneity, and transition probabilities and the asset payoff matrix satisfy mild regularity conditions. The paper also provides a new methodological technique to establish comparative statics, or perturbation, properties in such environments.     

REDUCE EMPLOYERS’ SOCIAL SECURITY CONTRIBUTIONS AND CONTROL LABOR FRAUD: REMEDIES FOR SPAIN'S AILING ECONOMY?

The aim of this paper is to quantify the impact of the reduction on social security contributions (SSCs) of employers recently claimed by the Spanish enterprisers’ organizations on the main macroeconomic variables. The effects of this tax reform are evaluated with a Computable General Equilibrium model with the neoclassical closure rule. The model is calibrated with a Social Accounting Matrix for the year 2000 (SAMES-00) elaborated by the authors. Results show that lower SSCs of employers raise employment, households’ welfare and real gross domestic product (GDP) but also increase the public deficit. These positive effects remain when the reduction is compensated with personal income taxes to keep the public deficit/GDP ratio constant and also when the compensating variable is value-added tax (VAT). Unlike in previous studies, the most positive effects are obtained when the lower public revenues are compensated via lower coverage of unemployment benefits.     

Replica core equivalence theorem: An extension of the Debreu–Scarf limit theorem to double infinity monetary economies

An overlapping generations model with the double infinity of commodities and agents is the most fundamental framework to introduce outside money into a static economic model. In this model, competitive equilibria may not necessarily be Pareto-optimal. Although Samuelson (1958) emphasized the role of fiat money as a certain kind of social contract, we cannot characterize it as a cooperative game-theoretic solution like the core. In this paper, we obtained a finite replica core characterization of Walrasian equilibrium allocations under non-negative wealth transfer and a core-limit characterization of Samuelson’s social contrivance of money. Preferences are not necessarily assumed to be ordered.     

On the optimal size of Social Security in the presence of a stock market

The paper develops a stylized overlapping generations economy with random production and a stock market. The impact of a Social Security system on production, asset markets, and consumer welfare is analyzed. It is shown that any reduction in the contribution rate fosters capital accumulation and increases asset prices, wages, and production output. Different welfare criteria are applied to determine the optimal size of Social Security. It is shown that there exists a unique contribution rate which is long-run optimal, socially optimal, and time-consistent in the sense that no generation has an incentive to change it.     

On the role of labor supply for the optimal size of Social Security

The paper studies the welfare effects of a Social Security system in a stylized overlapping generations economy with random production and capital accumulation. Different welfare concepts including long run optimality, social optimality, and time consistency are employed to determine the optimal size of the system. When labor supply is exogenous, a unique contribution level can be identified which is optimal according to all three concepts. When labor supply is endogenous, however, this result generically fails to hold and the long-run optimal solution is only constrained socially optimal while the time-consistent policy may even lead to an inefficient equilibrium.     

Cyclical equilibria in multi-sector productive economies: The role of substitution and factor intensity

The paper examines the existence of cyclical perfect foresight equilibria in a two-sector overlapping generations economy with production in which both goods enter consumption. Conditions for the existence of two types of cyclical equilibra are obtained in terms of elasticities of substitution in production and consumption, factor shares in production, and expenditure shares in consumption. The role of substitution possibilities and factor intensities is highlighted. It is shown that factor intensity assumptions are not enough to rule out cyclical equilibria and that limit cycles may exist for substantial amounts of substitution possibilities in production; what matters is the relative sizes of the consumption and production elasticities. The results are illustrated using CES functions. A dynamical simulation of an economy which exhibits a Hopf cycle is presented.     

Active intermediation in a monetary overlapping generations economy

This paper establishes that the profit-seeking activities of private intermediaries can ensure Pareto efficiency in the standard pure-exchange monetary overlapping generations economy without the need for government monetary or fiscal policy intervention. Moreover, these profit-seeking activities are shown to rule out all aperiodic and k-periodic cycles for k greater than 2. Contrary to much recent work on intermediation, the profit opportunities that arise for intermediaries in this context are not due to assumed frictions or asymmetric information. Rather, they are due to the dynamic open-ended structure of the economy, which permits debt roll-over.     

Modelling Commodity Balances in a Computable General Equilibrium Context

This paper is the second part of a two-part discussion which elaborates the proposition that Stone's concept of commodity technology is the appropriate assumption on which to build in modelling commodity balances. The analysis in the first part was developed from a social accounting representation of commodity balances into a formal statement of the Stone model and the conditions under which it admits an acceptable solution. This second part develops a generalization of Stone's original formulation, in the spirit that the modelling of commodity balances should be approached in a general equilibrium context which recognizes that, in the final analysis, prices and quantities are interdependent.     

Macroeconomic effects of the regional allocation of public capital formation

This paper proposes a multi-regional, general equilibrium model with capital accumulation to analyze the economic impact of the spatial distribution of public capital formation. This model is calibrated and solved by using data for the Spanish economy in order to simulate some comparative dynamic exercises of fiscal policy changes. These analyses illustrate the role that public investment plays in generating the existing imbalances in regional development. This is done by computing the spillover effects and the opportunity costs of regional distribution of public investment. Finally, two rankings of regional priorities in public investment can be derived: one based on the criterion of reducing regional disparities, and another based on an efficiency criterion.     

Why do we postpone annuity purchases?

This paper seeks to explain why annuity purchases are postponed to a later age. We consider an overlapping generations model with uncertain lifetime and two types of annuities. It is shown that, if the economy is dynamically inefficient, individuals demand annuities without delay. However, if it is efficient, annuity purchases are postponed. We also show that these results are robust to several extensions.     

Incorporating sustainability indicators into a computable general equilibrium model of the scottish economy

In recent years, the notion of sustainable development has begun to figure prominently in the regional, as well as the national, policy concerns of many industrialized countries. Indicators have typically been used to monitor changes in economic, environmental and social variables to show whether economic development is on a sustainable path. In this paper we endogenize individual and composite environmental indicators within an appropriately specified computable general equilibrium modelling framework for Scotland. In principle, at least, this represents a very powerful modelling tool that can inform the policy making process by identifying the impact of any exogenous policy change on the key endogenous environmental and economic indicators. It can also identify the effects of any binding environmental targets on economic activity.     

SOCIAL SECURITY AND RETIREMENT DECISION: A POSITIVE AND NORMATIVE APPROACH*

Abstract Social insurance for the elderly is judged responsible for the widely observed trend towards early retirement. In a world of laissez‐faire or in a first‐best setting, there would be no such trend. However, when first‐best instruments are not available, because health and productivity are not observable, the optimal social insurance policy may imply a distortion on the retirement decision. The main point we make is that while there is no doubt that retirement systems induce an excessive bias towards early retirement in many countries, a complete elimination of this bias (i.e. a switch to an actuarially fair system) is not the right answer for two reasons. First, some distortions are second‐best optimal. This is the normative argument. Second, and on the positive side, the elimination of the bias might be problematic from a political perspective. Depending on the political process, either it may not be feasible or alternatively it may tend to undermine the political support for the pension system itself.