The Optimal Design of Funded Pension Plans: Unbundling Financing and Investment

University of Bocconi Econpubblica Working Paper

20 Pages Posted: 22 Oct 2005

See all articles by Luciano G. Greco

Luciano G. Greco

University of Padua - Department of Economics

Date Written: September 2005

Abstract

The design of fully funded pension plans is affected by governance and incentive problems, as underlined by the experience of several countries. The analytic perspective of contract theory allows to detect the nature of such problems: pension-fund managers have strong incentives to manipulate market expectations about their capacity through wasteful activities (e.g., marketing). The design of funded pension plans has, thus, to trade-off efficiency losses and gains linked to high-powered incentives associated to the competition among fund managers. By means of a simple theoretical setting, this trade-off is shown to be driven by the integration of financing (contribution collection) and investment (asset allocation and management) activities. A separation of financing and investment allows to centralize the former and allocate collected money to a sector of competitive fund managers, via an auction mechanism. Under contract incompleteness, the quasi-competitive setting of funded pillar is proven to be Pareto-superior to the market of competitive pension funds (integrating financing and investment).

Keywords: Funded pensions, Governance, Auctions

JEL Classification: D02, D23, D44, D7, D8, H11, H42

Suggested Citation

Greco, Luciano G., The Optimal Design of Funded Pension Plans: Unbundling Financing and Investment (September 2005). University of Bocconi Econpubblica Working Paper. Available at SSRN: https://ssrn.com/abstract=824727 or http://dx.doi.org/10.2139/ssrn.824727

Luciano G. Greco (Contact Author)

University of Padua - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
120
Abstract Views
998
rank
238,498
PlumX Metrics