Optimal Design of Pension Funds: A Mission Impossible
CentER Discussion Paper Series No. 1998-25
Posted: 2 Dec 1998
Date Written: 1998
Nowadays many employers offer their employees the possibility of an insurance against too large losses in income when retiring or becoming disabled. This paper models the optimization problem of the employer when setting up such a so-called pension fund. Not surprisingly, it turns out that the optimal solution depends on the premium the employees are willing to pay at most for the insurance. Since this is private information for an employee and hence not known to the employer, he needs to collect information regarding these maximum premiums. It is shown that in most cases the employer is unable to perfectly inform himself on these maximum premiums. So, he cannot create the right incentives for his employees to reveal their maximum premiums truthfully.
JEL Classification: J33
Suggested Citation: Suggested Citation