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Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists

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  • Pesando, James E

Abstract

In analyzing corporate pension plans, financial economists typically invoke the spot model of the labor market, where the worker's cash wage plus accruing pension benefit equals the value of his marginal product each period. This paper provides evidence again st the empirical validity of this model, using provisions common to m ost pension plans. Incentive effects, ruled out by the spot model, ma y help explain certain well known "puzzles," such as the failure of employers to fully fund their plans despite the tax advantages of do ing so. Copyright 1987 by Oxford University Press.

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  • Pesando, James E, 1987. "Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 215-238, April.
    • Handle: RePEc:oup:ecinqu:v:25:y:1987:i:2:p:215-38
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    References listed on IDEAS

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    1. J. Michael Harrison & William F. Sharpe, 1983. "Optimal Funding and Asset Allocation Rules for Defined-Benefit Pension Plans," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 91-106, National Bureau of Economic Research, Inc.
    2. James L. Medoff & Katharine G. Abraham, 1981. "Are Those Paid More Really More Productive? The Case of Experience," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 186-216.
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    4. Jeremy I. Bulow & Myron S. Scholes, 1983. "Who Owns the Assets in a Defined-Benefit Pension Plan?," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 17-36, National Bureau of Economic Research, Inc.
    5. Pesando, James E, 1982. "Investment Risk, Bankruptcy Risk, and Pension Reform in Canada," Journal of Finance, American Finance Association, vol. 37(3), pages 741-749, June.
    6. Martin Feldstein & Randall Morck, 1983. "Pension Funding Decisions, Interest Rate Assumptions, and Share Prices," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 177-210, National Bureau of Economic Research, Inc.
    7. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1.
    8. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    9. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    10. Jeremy I. Bulow, 1981. "Early Retirement Pension Benefits," NBER Working Papers 0654, National Bureau of Economic Research, Inc.
    11. Ippolito, Richard A, 1985. "The Economic Function of Underfunded Pension Plans," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 611-651, October.
    12. Laurence J. Kotlikoff & Daniel E. Smith, 1983. "Pensions in the American Economy," NBER Books, National Bureau of Economic Research, Inc, number kotl83-1.
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    Cited by:

    1. Anna M. Caristo, 2015. "Incentivos al trabajo y cobertura de riesgos de los programas de pensiones: el caso de Uruguay," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 61, pages 81-126, January-D.
    2. Douglas K. Pearce & V. Vance Roley, 1987. "Firm Characteristics, Unanticipated Inflation, and Stock Returns," NBER Working Papers 2366, National Bureau of Economic Research, Inc.

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