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Social security as Markov equilibrium in OLG models: Clarifications and some new insights

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  • Lopez-Velasco, Armando R.

Abstract

This paper studies the politico-economic sustainability of pay-as-you-go social security in OLG models under Markovian strategies as first studied by Forni (2005). Under logarithmic utility, the paper shows that equilibria with social security can only exist if the underlying economy is dynamically inefficient. The paper also derives the exact parametric conditions that allow for the existence of equilibria and shows that among all the admissible (arbitrary) constants that produce a Markov perfect equilibrium, the maximum constant in such set yields the only equilibrium that solves dynamic inefficiency.

Suggested Citation

  • Lopez-Velasco, Armando R., 2022. "Social security as Markov equilibrium in OLG models: Clarifications and some new insights," Economics Letters, Elsevier, vol. 217(C).
    • Handle: RePEc:eee:ecolet:v:217:y:2022:i:c:s0165176522002427
    DOI: 10.1016/j.econlet.2022.110707
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    References listed on IDEAS

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    1. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(1), pages 1-19.
    2. Zheng Song, 2011. "The Dynamics of Inequality and Social Security in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 613-635, October.
    3. Gonzalez-Eiras, Marti­n & Niepelt, Dirk, 2008. "The future of social security," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 197-218, March.
    4. Martin Gonzalez-Eiras, 2011. "Social security as Markov equilibrium in OLG models: a note," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 549-552, July.
    5. Lorenzo Forni, 2005. "Social Security as Markov Equilibrium in OLG Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 178-194, January.
    6. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
    7. Lopez-Velasco, Armando R., 2016. "Solving dynamic inefficiency with politically sustainable guest worker programs," Economics Letters, Elsevier, vol. 148(C), pages 1-4.
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    Cited by:

    1. Valentin Marian Antohi & Romeo Victor Ionescu & Marius Sorin Dinca & Monica Laura Zlati & Costinela Fortea, 2023. "Dynamics of the Social Security Index in the Context of the Economic Crisis in Romania," Sustainability, MDPI, vol. 15(4), pages 1-17, February.
    2. Lopez-Velasco, Armando R., 2024. "Markov equilibrium of social security: An analytic solution under CRRA utility and the future of social security," Economic Modelling, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    Social security; Political-economy model; Overlapping generations; Markov perfect; Golden rule; Dynamic inefficiency;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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