Dynamic Defined-Contribution Pension Design with Adverse Selection and Moral Hazard

45 Pages Posted: 5 Nov 2011

See all articles by Tsz-Nga Wong

Tsz-Nga Wong

Washington University in St Louis

Date Written: March 30, 2009

Abstract

We study voluntary defined-contribution pension contracts with the incentive problem of early retirement and low contributions over time. Agents are free to retire, quit a plan and choose between plans. The fluctuation of labor productivity throughout working life and the length of working life are private information. The optimal contract can be implemented through transfers (sometimes negative) and contribution deductions from agents' pensions over time. The optimal contract features a punishment phase, an accumulation phase and a retirement phase. We find that the amount of pension is higher under the optimal contract than under laissez faire. Working agents enjoy higher consumption, contribute less, and retire later. The result is robust to different environments.

Keywords: Defined-Contribution Pension, Dynamic Adverse Selection and Moral Hazard, Retirement, Risk-Neutral Measure

Suggested Citation

Wong, Tsz-Nga, Dynamic Defined-Contribution Pension Design with Adverse Selection and Moral Hazard (March 30, 2009). Available at SSRN: https://ssrn.com/abstract=1954235 or http://dx.doi.org/10.2139/ssrn.1954235

Tsz-Nga Wong (Contact Author)

Washington University in St Louis ( email )

One Brookings Drive
St. Louis, MO 63130
United States

HOME PAGE: http://sites.google.com/site/tszngawong/

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