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Fostering Within-Family Human-Capital Investment: An Intragenerational Insurance Perspective of Social Security

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  • Martin Barbie
  • Marcus Hagedorn
  • Ashok Kaul

Abstract

We propose an extended pay-as-you-go social security system that conditions pension benefits on the aggregate wage sum and on the wage of one's children. The latter increases parents' incentives to provide their children with good within-family education. However, since wages depend stochastically on parents' unobservable investment in their children's human capital, some insurance against the productivity risk of one's children is provided, because retirement income still depends on aggregate wages. We analyze the effects of such a social security system on the endogenous distribution of human capital and compare it with real-world systems, which typically do not condition benefits on the wages of one's children. Our approach suggests a novel role for a well-designed social security system: it can foster human-capital accumulation and act as an intragenerational insurance against productivity risk.

Suggested Citation

  • Martin Barbie & Marcus Hagedorn & Ashok Kaul, 2006. "Fostering Within-Family Human-Capital Investment: An Intragenerational Insurance Perspective of Social Security," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 503-529, December.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200612)62:4_503:fwhiai_2.0.tx_2-
    DOI: 10.1628/001522106X172670
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    Cited by:

    1. Meier, Volker & Wrede, Matthias, 2010. "Pensions, fertility, and education," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(1), pages 75-93, January.
    2. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundations of Trust and Social Preferences," IZA Discussion Papers 1641, Institute of Labor Economics (IZA).
    3. Armin Falk & Ernst Fehr & Christian Zehnder, "undated". "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
    4. Tania Singer & Ernst Fehr, 2005. "The Neuroeconomics of Mind Reading and Empathy," American Economic Review, American Economic Association, vol. 95(2), pages 340-345, May.

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    More about this item

    Keywords

    human-capital formation; social security; intragenerational insurance; heterogeneous households;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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