Pay-as-you-go social security and the distribution of bequests

This paper studies the impact of an unfunded social security system on the distribution of bequests in a framework where savings are due both by life cycle and by random altruistic motivations. We show that the impact of social security on the distribution of bequests depends crucially on the importance of the bequest motive in explaining savings behavior. If the bequest motive is strong, then an increase in the social security tax raises the bequests left by altruistic parents. On the other hand, when the importance of bequests in motivating savings is sufficiently low, theincrease in the social security tax could result in a reduction of the bequests left by altruistic parents under some conditions on the attitude of individuals toward risk and on the relative returns associated with private saving and social security. Some implications concerning the transitional effects of introducing an unfunded social security scheme are also discussed.

The Farm, the city, and the emergence of social security

We study the social, demographic and economic origins of social security. The data for the U.S. and for a cross section of countries suggest that urbanization and industrialization are associated with the rise of social insurance. We describe an OLG model in which demographics, technology, and social security are linked together in a political economy equilibrium. In the model economy, there are two locations (sectors), the farm (agricultural) and the city (industrial) and the decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Farmers rely on land inheritance for their old age and do not support a pay-as-you-go social security system. With structural change, people migrate to the city, the land loses its importance and support for social security arises. We show that a calibrated version of this economy, where social security taxes are determined by majority voting, is consistent with the historical transformation in the United States.

Social Security in Theory and Practice (II): Efficiency Theories, Narrative Theories, and Implications for Reform

166 countries have some kind of public old age pension. What economic forces create and sustain old age Social Security as a public program? Mulligan and Sala-i-Martin (1999b) document several of the internationally and historically common features of social security programs, and explore "political" theories of Social Security. This paper discusses the "efficiency theories", which view creation of the SS program as a full of partial solution to some market failure. Efficiency explanations of social security include the "SS as welfare for the elderly" the "retirement increases productivity to optimally manage human capital externalities", "optimal retirement insurance", the "prodigal father problem", the "misguided Keynesian", the "optimal longevity insurance", the "government economizing transaction costs", and the "return on human capital investment". We also analyze four "narrative" theories of social security: the "chain letter theory", the "lump of labor theory", the "monopoly capitalism theory", and the "Sub-but-Nearly-Optimal policy response to private pensions theory". The political and efficiency explanations are compared with the international and historical facts and used to derive implications for replacing the typical pay-as-you-go system with a forced savings plan. Most of the explanations suggest that forced savings does not increase welfare, and may decrease it.

Altruism, uncertain lifetime and the distribution of wealth

This paper studies the dynamics of the distribution of wealth in ageneral equilibrium framework. It considers an overlapping generationsmodel with production and altruistic preferences in which individualsface an uncertain lifetime and annuity markets do not exist. Thispaper focuses on the role that accidental bequests, voluntary bequests,and non--negativity constraints on bequests play in the dynamics of thedistribution of wealth. It is proved that the equilibrium interestrate is lower than the one that satisfies the modified goldenrule. In this economy, a social security system not only plays aninsurance role, but also prevents capital overaccumulation. In fact,this paper shows that a pay--as--you--go social security systemdecentralizes the social planner solution as a competitive equilibrium.

Social security in theory and practice (II): Efficiency theories, narrative theories and implications for reform

166 countries have some kind of public old age pension. What economic forcescreate and sustain old age Social Security as a public program? Mulligan and Sala-i-Martin (1999b) document several of the internationally and historically common features of social security programs, and explore "political" theories of Social Security. This paper discusses the "efficiency theories", which view creation of the SS program as a full of partial solution to some market failure. Efficiency explanations of social security include the "SS as welfare for the elderly" the "retirement increases productivity to optimally manage human capital externalities", "optimal retirement insurance", the "prodigal father problem", the "misguided Keynesian", the "optimal longevity insurance", the "governmenteconomizing transaction costs", and the "return on human capital investment". We also analyze four "narrative" theories of social security: the "chain letter theory", the "lump of labor theory", the "monopoly capitalism theory", and the "Sub-but-Nearly-Optimal policy response to private pensions theory".The political and efficiency explanations are compared with the international and historical facts and used to derive implications for replacing the typical pay-as-you-go system with a forced savings plan. Most of the explanations suggest that forced savings does not increase welfare, and may decrease it.

Social security in theory and practice (I): Facts and political theories

166 countries have some kind of public old age pension. What economic forcescreate and sustain old age Social Security as a public program? We document some of the internationally and historically common features of Social Security programs including explicit and implicit taxes on labor supply, pay-as-you-go features, intergenerational redistribution, benefits which areincreasing functions of lifetime earnings and not means-tested. We partition theories of Social Security into three groups: "political", "efficiency" and "narrative" theories. We explore three political theories in this paper: the majority rational voting model (with its two versions: "the elderly as the leaders of a winning coalition with the poor" and the "once and for all election" model), the "time-intensive model of political competition" and the "taxpayer protection model". Each of the explanations is compared with the international and historical facts. A companion paper explores the "efficiency" and "narrative" theories, and derives implicationsof all the theories for replacing the typical pay-as-you-go system with a forced savings plan.

Beyond the Toledo agreement : the intergenerational impact of the spanish pension reform

The paper examines the intergenerational impact of the Spanish public pension system after the 1997 Pension Reform Act. Working within a Generational Accounting framework, we find that maintaining the new legal setting could leave future generations with liabilities as high as 176 percent of base year GDP. As the recent reform measures have been insufficient to achieve the sustainability of the current pension system, we also analyse the impact of alternative reform strategies. Within the current pay-as-you-go setting, a further improvement to tax-benefit linkage in line with the original spirit of the Toledo Agreement is shown to yield and intergenerationally more balanced outcome,than an increase in the retirement age or an expansion of public subsidies financed through indirect taxes. Finally, we examine the generational impact of a move toward a partially funded pension system which might restore theintergenerational balance

Beyond the Toledo agreement : the intergenerational impact of the spanish pension reform

The paper examines the intergenerational impact of the Spanish public pension system after the 1997 Pension Reform Act. Working within a Generational Accounting framework, we find that maintaining the new legal setting could leave future generations with liabilities as high as 176 percent of base year GDP. As the recent reform measures have been insufficient to achieve the sustainability of the current pension system, we also analyse the impact of alternative reform strategies. Within the current pay-as-you-go setting, a further improvement to tax-benefit linkage in line with the original spirit of the Toledo Agreement is shown to yield and intergenerationally more balanced outcome,than an increase in the retirement age or an expansion of public subsidies financed through indirect taxes. Finally, we examine the generational impact of a move toward a partially funded pension system which might restore theintergenerational balance

The underestimation of compliance to direct help requests explained by adaptive sampling

Helping behavior is any intentional behavior that benefits another living being or group (Hogg & Vaughan, 2010). People tend to underestimate the probability that others will comply with their direct requests for help (Flynn & Lake, 2008). This implies that when they need help, they will assess the probability of getting it (De Paulo, 1982, cited in Flynn & Lake, 2008) and then they will tend to estimate one that is actually lower than the real chance, so they may not even consider worth asking for it. Existing explanations for this phenomenon attribute it to a mistaken cost computation by the help seeker, who will emphasize the instrumental cost of “saying yes”, ignoring that the potential helper also needs to take into account the social cost of saying “no”. And the truth is that, especially in face-to-face interactions, the discomfort caused by refusing to help can be very high. In short, help seekers tend to fail to realize that it might be more costly to refuse to comply with a help request rather than accepting. A similar effect has been observed when estimating trustworthiness of people. Fetchenhauer and Dunning (2010) showed that people also tend to underestimate it. This bias is reduced when, instead of asymmetric feedback (getting feedback only when deciding to trust the other person), symmetric feedback (always given) was provided. This cause could as well be applicable to help seeking as people only receive feedback when they actually make their request but not otherwise. Fazio, Shook, and Eiser (2004) studied something that could be reinforcing these outcomes: Learning asymmetries. By means of a computer game called BeanFest, they showed that people learn better about negatively valenced objects (beans in this case) than about positively valenced ones. This learning asymmetry esteemed from “information gain being contingent on approach behavior” (p. 293), which could be identified with what Fetchenhauer and Dunning mention as ‘asymmetric feedback’, and hence also with help requests. Fazio et al. also found a generalization asymmetry in favor of negative attitudes versus positive ones. They attributed it to a negativity bias that “weights resemblance to a known negative more heavily than resemblance to a positive” (p. 300). Applied to help seeking scenarios, this would mean that when facing an unknown situation, people would tend to generalize and infer that is more likely that they get a negative rather than a positive outcome from it, so, along with what it was said before, people will be more inclined to think that they will get a “no” when requesting help. Denrell and Le Mens (2011) present a different perspective when trying to explain judgment biases in general. They deviate from the classical inappropriate information processing (depicted among other by Fiske & Taylor, 2007, and Tversky & Kahneman, 1974) and explain this in terms of ‘adaptive sampling’. Adaptive sampling is a sampling mechanism in which the selection of sample items is conditioned by the values of the variable of interest previously observed (Thompson, 2011). Sampling adaptively allows individuals to safeguard themselves from experiences they went through once and turned out to lay negative outcomes. However, it also prevents them from giving a second chance to those experiences to get an updated outcome that could maybe turn into a positive one, a more positive one, or just one that regresses to the mean, whatever direction that implies. That, as Denrell and Le Mens (2011) explained, makes sense: If you go to a restaurant, and you did not like the food, you do not choose that restaurant again. This is what we think could be happening when asking for help: When we get a “no”, we stop asking. And here, we want to provide a complementary explanation for the underestimation of the probability that others comply with our direct help requests based on adaptive sampling. First, we will develop and explain a model that represents the theory. Later on, we will test it empirically by means of experiments, and will elaborate on the analysis of its results.

It's what you say not what you pay

We study manager-employee interactions in experiments set in a corporate environment where payoffs depend on employees coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak-link game. In the absence of managerial intervention subjects invariably slip into coordination failure. To overcome a history of coordination failure, managers have two instruments at their disposal, increasing employees' financial incentives to coordinate and communication with employees. We find that communication is a more effective tool than incentive changes for leading organizations out of performance traps. Examining the content of managers' communication, the most effective messages specifically request a high effort, point out the mutual benefits of high effort, and imply that employees are being paid well.

If you want me to stay, pay

Devolution of political power is constantly on the political agenda in both Italy and Spain. Fiscal policy in these countries has granted specific privileges to some regions. Valle d’Aosta/Vallée d’Aoste,(VdA) and País Vasco-Euskadi (PV) have an extensive say over spending decisions, and receive nearly all regional tax revenues. Although both VdA and PV are among the richest regions in each country, both are net beneficiaries of the fiscal equalisation system. This preferential treatment is the outcome of a fiscal system with limits on taxing power and debt issuance, and is meant as a compensation for the lack of autonomy. It so prevents calls for more fiscal autonomy, or even outright secession. The economic effects of this asymmetric federalism are negative Although partial equalisation reduces excessive redistribution built in the fiscal equalisation system, more autonomy could pay off with more efficient government. Asymmetric federalism moreover creates a political impasse in the negotiation of a more efficient tax system and financing arrangement.

Seniority-based pay: is it used as a motivation device?

The purpose of this article is to explain what factors determine the use of seniority-based pay for production workers in Spanish manufacturing industry. The data used in order to achieve these objectives was taken from 774 Spanish industrial plants. The estimation of several ordered probit models enabled us to see that in firms where it was more costly for management to engage in opportunistic behaviour, deferred payment shows a negative relation to the use of devices, like monitoring or incentive payment, designed to align workers’ objectives with those of the company.

A change would do you good . . . An experimental study on how to overcome coordination failure in organizations

Many organizations suffer poor performance because individuals within the organization fail to coordinate on efficient patterns of behavior. Using controlled laboratory experiments, we study how financial incentives can be used to find a way out of such performance traps. Our experiments are set in a corporate environment where subjects' payoffs depend on coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak-link game. In an initial phase, the benefits of coordination are low relative to the cost of increased effort. Play in this initial phase typically converges to an inefficient outcome with employees failing to coordinate at high effort levels. The experimental design then explores the effects of varying the financial incentives to coordinate at a higher effort level. We find that an increase in the benefits of coordination leads to improved coordination, but, surprisingly, large increases have no more impact than small increases. Once subj

I want you! An experiment studying the selection effect when assigning distributive power.

We study whether selection affects motivation. In our experiment subjects first answer a personality questionnaire. They then play a 3-person game. One of the three players decides between an outside option assigning him a positive amount, but leaving the two others empty-handed and allowing one of the other two players to distribute a pie. Treatments differ in the procedure by which distributive power is assigned: to a randomly determined or to a knowingly selected partner. Before making her decision the selecting player could consult the personality questionnaire of the other two players. Results show that knowingly selected players keep less for themselves than randomly selected ones and reward the selecting player more generously.

(When) would i lie to you? comment on? deception: the role of consequences?

This paper reconsiders the evidence on lying or deception presented in Gneezy (2005,American Economic Review). We argue that Gneezy?s data cannot reject the hipótesis that people are one of two kinds: either a person will never lie, or a person will lie whenever she prefers the outcome obtained by lying over the outcome obtained by telling the truth. This implies that so long as lying induces a preferred outcome over truth-telling, a person?s decisión of whether to lie may be completely insensitive to other changes in the induced outcomes, such as exactly how much she monetarily gains relative to how much she hurts an anonymous partner. We run new but similar experiments to those of Gneezy in order to test this hypothesis. We find that our data cannot reject this hypothesis either, but we also discover substantial differences in behavior between our sub jects and Gneezy?s sub jects.