Temptation and social security in a dynastic framework |
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Authors: | Cagri S. Kumru Chung Tran |
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Affiliation: | 1. Australian National University, Research School of Economics, Australian National University, Canberra, ACT 0200, Australia;2. ARC Centre of Excellence in Population Ageing Research, UNSW, Sydney, NSW 2052, Australia |
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Abstract: | We investigate welfare and aggregate implications of a pay-as-you-go (PAYG) social security system in a dynastic framework in which individuals have self-control problems. The presence of self-control problems induces individuals to save less because of their urge for temptation towards current consumption. Individuals' efforts to balance between the short-term urge for temptation and the long-term commitment for consumption smoothing result in self-control costs. In this environment PAYG social security works as a self-control cost reducing device. In contrast, the presence of altruism induces individuals to save more. This in turn mitigates the adverse effects of self-control problems and PAYG social security on savings but magnifies the self-control costs. We find that in our environment the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporate altruism and self control issues separately. However, the level of mitigation is quite modest. |
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