A Probabilistic Voting Model of Social Security with Myopic Agents

Posted: 2 Dec 2015

See all articles by Xue Wen

Xue Wen

IMT Institute for Advanced Studies

Date Written: July 29, 2015

Abstract

This paper investigates the political incentives for the design of a Pay-as-you-go public pension system in a probabilistic voting model with both far-sighted and myopic agents. People vote for a payroll tax rate determining the size of the pension system and a Bismarckian factor representing the redistribution degree of the system. The pension system acts as a redistribution mechanism and a commitment device. The far-sighted households prefer a contributive social security system. The myopic households prefer a more redistributive pension system but not necessarily a more generous pension system due to the trade-off between redistribution and efficiency. Office seeking politicians can target the far-sighted and myopic groups by leveraging the generosity and the redistribution degree of the social security system. In the political equilibrium, the payroll tax rate is U-shaped with respect to the Bismarckian factor, which can partially explain the political puzzle that why, in practice, Bismarckian pension systems tend to be associated with a larger pension base.

Keywords: Myopia, Social Security, Probabilistic Voting

JEL Classification: H55, D91, H30

Suggested Citation

Wen, Xue, A Probabilistic Voting Model of Social Security with Myopic Agents (July 29, 2015). Available at SSRN: https://ssrn.com/abstract=2697985

Xue Wen (Contact Author)

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

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