The Welfare Gains of Improving Risk Sharing in Social Security

This paper shows that improved intergenerational risk sharing in social security may imply very large welfare gains, amounting to up to 15 percent of the per-period consumption relative to the current U.S. consumption. Improved risk sharing raises welfare through a direct effect, i.e., by correcting an initially inefficient allocation of risk, and through a general equilibrium (GE) effect. The GE effect is due to the fact that the allocation of risk in the pay-as-you-go system influences the demand for capital. As a result, with an efficient risk sharing arrangement, the crowding out effect associated with an unfunded system can actually be completely eliminated. Efficient risk sharing in social security implies highly volatile and pro-cyclical benefits, i.e., that retirees' exposure to productivity risk is increased. Consequently, a policy involving completely safe benefits will unambiguously be welfare reducing.Social security; Risk sharing

Why do Europeans Work so Little?

Market work per person is roughly 10 percent higher in the U.S. than in Sweden. However, if we include the work carried out in home production, the total amount of work only differs by 1 percent. I set up a model with home production, and show that differences in policy - mainly taxes – can account for the discrepancy in labor supply between Sweden and the U.S. Moreover, even though the elasticity of labor supply is rather low for individual households, labor taxes are estimated to be associated with considerable output losses. I also show that policy can account for the falling trend in market work in Sweden since 1960. The largest reduction occurs from 1960 until around 1980, both in the model and the data. After the early 1980s, the trends for both taxes and actual hours worked are basically flat. This is also true for hours worked in the model.Labor supply; Taxes; Home production

Social Security and the Equity Premium Puzzle

This paper shows that social security may be an important factor in explaining the equity premium puzzle. In the absence of shortselling constraints, the young shortsell bonds to the middle-aged and buy equity. Social security reduces the bond demand of the middle-aged, thereby restricting the possibilities of the young to finance their equity purchases. They demand less equity and the return to equity goes up. Social security also increases the covariance between future consumption and the equity income of the young. The efect on the equity premium is substantial. In fact, a model with social security and borrowing constraints can generate a fairly realistic equity premium.Asset prices; the equity premium puzzle; social security

The CO2 market failure: it’s free to emit but has costly consequences

There is now scientific consensus that humans affect the climate by emitting greenhouse gases into the atmosphere, and that this contributes to global warming. The most important greenhouse gas resulting from human activity is carbon dioxide (CO2), and it is generated as a by-product when fossil fuel is burnt. Even though it is clear that CO2 emissions contribute to global [...

On the Possibility of Political Change – Outcomes in Between Local and Global Equilibria

We study voting over education subsidies where poor individuals may be excluded and the rich may chose private alternatives. With plausible changes of the standard game we show that this problem typically has multiple equilibria; one with low taxes, many excluded, and many in private schooling; another with high taxes, everyone in schooling, and few choosing the private alternative. Shifts between these equilibria can only happen through jumps in policy, not through gradual change. The method we develop identifies the global, as well as all local majority rule equilibria, and it characterizes "stability regions" around each local equilibrium. Introducing costs into the political system can make the local equilibria the globally stable outcome which, for example, implies that identical countries with different starting points could end up with completely different redistributive systems. Outcomes change in intuitive ways with the parameters and several insights with respect to the possibilities of political change seem general for problems of redistribution with excludability.political economy; political equilibrium; voting; redistribution; education subsidies; local equilibrium; non-median voter equilibrium

Energy-saving technical change

We estimate an aggregate production function with constant elasticity of substitution between energy and a capital/labor composite using U.S. data. The implied measure of energysaving technical change appears to respond strongly to the oilprice shocks in the 1970s and has a negative medium-run correlation with capital/labor-saving technical change. Our findings are suggestive of a model of directed technical change, with low short-run substitutability between energy and capital/labor but significant substitutability over longer periods through technical change. We construct such a model, calibrate it based on the historical data, and use it to discuss possibilities for the futur

A Service of zbw Optimal taxation with home production Sveriges Riksbank Working Paper Series, No. 284 Optimal taxation with home production Optimal taxation with home production

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Why do Europeans Work so Little?

Market work per person is roughly 10 percent higher in the U.S. than in Sweden. However, if we include the work carried out in home production, the total amount of work only differs by 1 percent. I set up a model with home production, and show that differences in policy – mainly taxes – can account for the discrepancy in labor supply between Sweden and the U.S. Moreover, even though the elasticity of labor supply is rather low for individual households, labor taxes are estimated to be associated with considerable output losses. I also show that policy can account for the falling trend in market work in Sweden since 1960. The largest reduction occurs from 1960 until around d1980. both in the model and the data. After the early 1980s, the trends for both taxes and actual hours worked are basically flat. This is also true for hours worked in the model

The Welfare Gains of Improving Risk Sharing in Social Security

This paper shows that improved intergenerational risk sharing in social security may imply very large welfare gains, amounting to up to 15 percent of the per-period consumption relative to the current U.S. consumption. Improved risk sharing raises welfare through a direct effect, i.e., by correcting an initially inefficient allocation of risk, and through a general equilibrium (GE) effect. The GE effect is due to the fact that the allocation of risk in the pay-as-you-go system influences the demand for capital. As a result, with an efficient risk sharing arrangement, the crowding out effect associated with an unfunded system can actually be completely eliminated. Efficient risk sharing in social security implies highly volatile and pro-cyclical benefits, i.e., that retirees’ exposure to productivity risk is increased. Consequently, a policy involving completely safe benefits will unambiguously be welfare reducing