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Renegotiation of social contracts by majority rule

By Dan Anderberg and Carlo Perroni


We consider renegotiation of social earnings insurance arrangements by majority voting in an economy where ex-ante identical individuals make unobservable private investments in education. We show that voting-based renegotiation can result in a higher expected level of investment in comparison to the case where social insurance is determined by an appointed social planner. We also find that, with voting-based renegotioation, the availability of costly ex-post information about private investment can help overcome commitment problems. These findings call into question the practice of using a representative-consumer approach when modelling dynamic policy problems in large economies

Topics: JC
Publisher: University of Warwick, Department of Economics
Year: 2000
OAI identifier: oai:wrap.warwick.ac.uk:1611

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