Stochastic fertility, moral hazard, and the design of pay-as-you-go pension plans

Helmuth Cremer, Firouz Gahvari, Pierre Pestieau

Research output: Contribution to journalArticlepeer-review

Abstract

This article models a two-period overlapping generations economy in the steady state where the realization of the quantity/quality number of children depends on an initial investment in children and on a random shock. It shows that the implementation of the first-best allocation, in which the effort level is publicly observable, requires a subsidy on the investment in children. There should also be full insurance with respect to second-period consumption and pensions must be invariant to the number of children. On the other hand, when investment is unobservable and one cannot subsidize it, the full insurance property goes away. In this case, pensions must be linked positively to the number of children.

Original languageEnglish (US)
Article numberifr009
Pages (from-to)332-348
Number of pages17
JournalCESifo Economic Studies
Volume57
Issue number2
DOIs
StatePublished - Jun 2011

Keywords

  • Moral hazard
  • Pay-as-you-go social security
  • Stochastic fertility

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Economics and Econometrics

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