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Key Idea. Trade-off between two different strategies to maximise intertemporal consumption: Letting the State save on your behalf, by choosing a pension-covered job Choosing your own savings, by choosing an uncovered job The trade-off rests on the following two issues:
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Key Idea • Trade-off between two different strategies to maximise intertemporal consumption: • Letting the State save on your behalf, by choosing a pension-covered job • Choosing your own savings, by choosing an uncovered job • The trade-off rests on the following two issues: • Earnings differential: covered jobs yield higher gross output than uncovered ones. • Credit markets are imperfect: it might be worthwhile to sacrifice permanent income, if you wish to increase consumption in the present.
Main Result • Proposition 1 (The effect of the trade-off) • If productivity differential is sufficiently small: individuals prefer pension-uncovered jobs. • If productivity differential is sufficiently large: individuals prefer pension-covered jobs. • Proof: standard intertemporal consumption maximisation problem, in the presence of imperfect credit markets (in particular, borrowing interest rate is larger than lending rate), where the type of job chosen affects the budget constraint.
Applications • Welfare analysis for the role of a contributory pension system. • Is it good to have a contributory pension system when young agents suffer from unrealistic optimism? • Moral Hazard problems: mandatory social insurance • Is it good to have both contributory and non-contributory pension systems at work simultaneously?
Major Comments • Analysis is too partial equilibrium: • What determines the income differential between jobs? • Shouldn’t be in the model two labour markets (one for covered and one for uncovered jobs)? • Related, all the analysis is conducted by a Representative Agent, but • Aren’t choices different among the poor compared to the middle-class and rich?
Minor Comments • Two-period analysis: • Maybe a discussion of a many periods problem could shed light on the effect of different discount rates – e.g., do people who expect to die younger tend to choose uncovered jobs? • Fixed Life Expectancy: • Another issue is the fact that if people are risk-averse, choosing a covered job is also an insurance against living too long. • Why looking only at middle-class? (not clear)
