Pension Reform, Factor Mobility and Trade with Country-Specific Goods
Fedotenkov I., (2014). Pension reform, factor mobility and trade with country-specific goods, De Economist 162(3), p. 247-262
15 Pages Posted: 2 Apr 2012 Last revised: 27 Aug 2015
Date Written: April 2, 2012
This paper studies the effects of pension reform in a two-country model with country-specific goods. It shows that in the case of dynamic efficiency, a switch from a pay-as-you-go (PAYG) to a more-funded pension scheme leads to an inflow of labour to the reforming country. Reallocation of capital depends on the degree of substitutability between goods produced in the countries. If the goods produced in the countries are substitutes (complements), capital stock grows (declines) in the reformed country relative to the neighbouring country. Social security reform makes goods produced in the reformed country cheaper; this has an additional negative effect on the old generation in the reformed country, but compensates the old generation in the neighbouring country with cheaper imports due to a reduction in the tax base arising from emigration.
Keywords: Social security reform, mobile production factors, capital flows, elasticity of substitution
JEL Classification: F21, F22, H55
Suggested Citation: Suggested Citation