Savings Externalities in a Second-Best World

54 Pages Posted: 20 Feb 2017  

Andrew T. Hayashi

University of Virginia - School of Law

Daniel Patrick Murphy

University of Virginia - Darden School of Business

Date Written: February 16, 2017

Abstract

The debate among legal scholars about individuals’ failure to save enough for retirement happens on a “micro” level. It focuses on the causes and consequences of undersaving from the perspective of individuals and analyzes how legal interventions, such as tax subsidies and nudges, can best address individual saving mistakes. This debate depends on certain assumptions about how the macroeconomy operates. When these assumptions do not hold, neither do the implications of the micro analysis, turning the conventional analysis of undersaving on its head. In fact, in a variety of circumstances, saving imposes a negative externality. Consequently, what looks like undersaving at the individual level may result in oversaving in the aggregate, and private vice may become a public virtue. We adopt a macro perspective and argue for reforms of legal interventions designed to increase savings.

Suggested Citation

Hayashi, Andrew T. and Murphy, Daniel Patrick, Savings Externalities in a Second-Best World (February 16, 2017). Virginia Law and Economics Research Paper No. 2017-03; Darden Business School Working Paper No. 2918999; Virginia Public Law and Legal Theory Research Paper No. 2017-08. Available at SSRN: https://ssrn.com/abstract=2918999

Andrew T. Hayashi (Contact Author)

University of Virginia - School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Daniel Patrick Murphy

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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