Multiple Equilibria in the Welfare State

Excess distortions in the welfare state might be the consequence of the government's lack of ability to commit not to help "unlucky" agents. Incentive considerations that are crucial in standard insurance in the presence of moral hazard, plays no role in this case. As a consequence, the government might provide too much insurance. Still, equilibria with incomplete insurance and above-minimum effort might arise. Two possible reasons for multiple equilibria are explored in the paper, namely that marginal utility of consumption is positively associated with effort and that economic policy is costly. It is shown that the equilibria can be Pareto rankable. Borrowing analytical tools from recent developments in dynamic games (Matsui and Matsuyama, 1995), stability conditions of different equilibria are analyzed.

Transaction Costs and Overinsurance in Government Transfer Policy.

Benevolent governments lacking commitment ability provide too much insurance, if opportunistic private agents free ride on the government´s concern and exert too little effort expecting government assistance. Yet, the costs of implementing the transfer policy work as a commitment device, alleviating the credibility problem. Indeed, despite of the lack of commitment capacity, the government might provide incomplete insurance because of these transaction costs. Therefore, transaction costs can increase welfare by resolving the dynamic inconsistency faced by a welfare maximizing policymaker.Transfer policy; Transaction costs; Incomplete insurance.

On the Political Economy of the Welfare State.

There is a widespread feeling that welfare states are distorting incentives to a larger extent than what is socially optimal. In the present paper, this idea is formally analyzed with a model in which a benevolent government seeks to maximize the utility of risk-averse-opportunistic agents. The government can redistribute output from the "lucky" to the "unlucky", providing insurance. Under commitment, the government optimizes before agents choose the level of effort. Aware of incentive problems, the government will typically provide incomplete insurance, in order to induce some effort above the minimum. Under discretion, the government reoptimizes after agents chose effort. Thus, it faces a pure risk-sharing problem and provides full insurance. Agents anticipate government's actions so they choose the minimum effort. Social welfare might be lower under discretion: there would be overinsurance.

Welfare state dynamics

The goal in the present paper is twofold, to shed some light on endogenous dynamic of the welfare states, and to provide a procedure to select among several equilibria. To this end, a dynamic model is presented, in which private agents are assumed to be "locked" to current decisions for a while. If "frictions" are large enough, the economy might exhibit more than one stable Paretorankable stationary state. Equilibrium paths would then be determined by history. The economy might become "stuck" at an inferior stationary state, with too much insurance and too little effort.

The portability of pension rights : general principals and the Caribbean case

The portability of pension rights is an increasingly important issue in the Caribbean. The large and increasing flows of migrant workers, including both permanent and temporary migrants, the small size of the domestic economies and the process of regional integration and economic openness call for effective means to make pensions portable. This document presents a select survey of the literature on pension portability and reviews the progress made by the Caribbean countries as well as some remaining challenges in the light of the international experience.Pensions&Retirement Systems,Debt Markets,Emerging Markets,Gender and Law,Labor Markets

Are stabilization programs expansionary?

The empirical evidence presented in this paper casts doubts on the by now widely accepted "fact"that exchange rate based stabilization programs are expansionary. Even though these programs were associated with output booms, no evidence was found to support the thesis that the booms were caused by the stabilization programs. Rather, positive external shocks seem to have caused both the output booms and the stabilization programs

Labor Market "Rigidity" and the Success of Economic Reforms Across more than One Hundred Countries

This paper shows that labor market policies and institutions have an impact on the effectiveness of economic reform programs. The analysis compares annual growth rates across 119 countries, using data from 449 adjustment credits and loans given by the World Bank between 1980 and 1996. The results indicate that countries with relatively “rigid” labor markets experienced deeper recessions before adjustment and slower recoveries afterwards. The paper also disentagles the mechanisms through which labor market “rigidity” operates. It finds that minimum wages and mandatory benefits have a marginal impact only. The size and strength of organized labor, on the other hand, appear to be crucial. Labor market rigidity thus seem to be relevant for political reasons, more than for economic reasons. The paper shows that these findings are robust to changes in the sample and specification. Overall, the results suggest that insufficient attention has been paid to the compensation of vocal groups who stand to lose from economic reforms.

How much do Latin American pension programs promise to pay back?

The authors present a new database of social security indicators for eleven Latin American countries designed to assess pension schemes in terms of the payments they promise in return to contributions. Based on this data, authors analyze inequality, insurance and incentives to work, using the replacement rates and the internal rates of return implicit in the flows of contributions and pensions. Results indicate that most programs analyzed are progressive in the sense that, other things equal, they yield higher returns to low than to high income workers. Poor workers, notwithstanding, often have flat age-earnings profiles and lower life expectancy, both of which reduce the rates of return received from social security. The Argentinean and (the pre-2008) Uruguayan programs severely punish short contribution careers, providing strong incentives for workers in the programs to continue contributing until they reach minimums that vary between 30 and 35 years of contributions. The counterpart is that these programs do not hedge workers against the risk of having short working careers; quite the opposite, they raise the uncertainty workers face. The very low rates of return that the Argentinean and Uruguayan main pension programs pay to workers with short working careers are likely to impact strongly on low income workers, as the probability they experience interruptions is higher. The Brazilian, Chilean and Mexican programs show a better balance between insurance against the risk of short working careers and incentives to work. The defined benefit programs of Argentina, Ecuador and Uruguay strongly discourage early retirement; the Chilean and Mexican programs are more neutral. Argentina, Chile and Uruguay passed reforms to their main pension programs in 2008. Unlike the Argentinean reform, the Chilean and Uruguayan 2008 reforms strengthened the social protection that programs provide, shifting the balance towards more insurance and less incentives to work.Pensions&Retirement Systems,Emerging Markets,Debt Markets,Gender and Law,Labor Markets

How much do Latin American pension programs promise to pay back?

We present a new database of social security indicators for eleven Latin American countries designed to assess pension schemes in terms of the payments they promise in return to contributions. Based on this data, we analyze inequality, insurance and incentives to work. Our results indicate that most programs analyzed are progressive in the sense that, other things equal, they yield higher returns to low than to high income workers. Poor workers, notwithstanding, often have flat age-earnings profiles and lower life expectancy, both of which reduce the rates of return received from social security. The Argentinean and (the pre-2008) Uruguayan programs severely punish short contribution careers, providing strong incentives but poor social protection. The Brazilian and Chilean programs show a better balance between insurance against the risk of short working careers and incentives to work. Argentina, Chile and Uruguay passed reforms to their main pension programs in 2008. Unlike the Argentinean reform, the Chilean and Uruguayan 2008 reforms strengthened the social protection that programs provide, shifting the balance towards more insurance and less incentives to work.Social Security internal rate of return, replacement rates.

Redistribution, Insurance and Incentives to Work in Latin American Pension Programs

We present a new database of social security indicators for eleven Latin American countries designed to show how much they promise to pay in return to contributions. The indicators are based on micro-simulations according to existing norms. Our results indicate that most programs are progressive. In most programs, retirement ages do not have a sizeable impact on the rates of return, given the length of service. The length of service has a strong impact on the expected returns to contributions, mostly due to vesting period conditions. Because of this, several pension programs in Latin America may be exacerbating income risk.Latin America, Social Security, Internal Rate of Return.