We investigate the effects of extending the coverage of social security to uncovered elderly individuals in the informal sector in developing countries. We use a stochastic overlapping generations framework and incorporate important characteristics of developing countries including family transfers and a sizeable informal sector. Our calibrated model predicts that the introduction of a moderately sized social assistance program decreases steady state output by up to 3.25% and labor supply by up to 2.5%. In contrast to literature focusing on developed countries, the model predicts that extending the coverage of the social security system results in welfare gains for low income households. This result indicates that the insurance function and the redistribution function of the social assistance program dominate the distortionary effects in an environment without adequate risk sharing mechanisms and high inequality.
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Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number
2007-026.
Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
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