Temptation and Social Security in a Dynastic Framework

42 Pages Posted: 25 Jun 2009 Last revised: 27 Sep 2009

See all articles by Cagri S. Kumru

Cagri S. Kumru

Australian National University (ANU)

Chung Tran

Australian National University (ANU) - School of Economics

Date Written: September 2, 2009

Abstract

We investigate welfare and aggregate implications of a pay-as-you-go (PAYG) social security system in a dynastic framework in which individuals have self-control problems. The presence of self-control problems induces individuals to save less because of their urge for temptation towards current consumption. Individuals’ efforts to balance between the short-term urge for temptation and the long-term commitment for consumption smoothing result in self-control costs. In this environment PAYG social security works as a self-control cost reducing device. In contrast, the presence of altruism induces individuals to save more. This in turn mitigates the adverse affects of self-control problems and PAYG social security on savings but magnifies the self-control costs. We find that in our environment the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporate altruism and self control issues separately. Interestingly, the welfare effects vary significantly across different types of households. Richer households demand more PAYG social security as they face larger self-control costs.

Keywords: Temptation, Self-control preferences, Altruism, Social security, Dynamic general equilibrium, Overlapping generations, Welfare

JEL Classification: E21, E62, H55

Suggested Citation

Kumru, Cagri S. and Tran, Chung, Temptation and Social Security in a Dynastic Framework (September 2, 2009). UNSW Australian School of Business Research Paper No. 2009 ECON 09, Available at SSRN: https://ssrn.com/abstract=1425252 or http://dx.doi.org/10.2139/ssrn.1425252

Cagri S. Kumru (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Chung Tran

Australian National University (ANU) - School of Economics ( email )

Arndt Building 25B
Canberra, Australian Capital Territory 0200
Australia

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