Bhattacharya, Joydeep; Andersen, Torben M

Forthcoming in Macroeconomic Dynamics

A classic result in dynamic public economics states that there is no welfare rationale for pay-as-you-go (PAYG) pensions in a dynamically-efficient neoclassical economy with exogenous labor supply. Parenthetically, a welfare justification for PAYG pensions exists if the economy is dynamically inefficient. Under a sufficient condition that the old be no less risk-averse than the young, these results extend to an economy with endogenous labor supply.

JEL Classification: E6, H3

Keywords: social security, dynamic efficiency, pay-as-you-go, Diamond model, endogenous labor supply

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