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Intergenerational Risk Sharing and Endogenous Labour Supply within Funded Pension Schemes
Author(s) -
Bonenkamp Jan,
Westerhout Ed
Publication year - 2014
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12092
Subject(s) - labour supply , welfare , economics , diversification (marketing strategy) , pension , labour economics , equity (law) , constraint (computer aided design) , wage , business , finance , market economy , mechanical engineering , marketing , political science , law , engineering
Funded defined‐benefit pensions add to welfare on account of providing intergenerational risk sharing, but lower it on account of inducing labour supply distortions. We show that a properly designed funded defined‐benefit pension scheme involves a welfare improvement even if contributions are distortionary and even if individuals face potentially correlated wage and equity risks. Numerical calculations indicate that diversification gains from risk sharing are large compared to the losses related to labour supply distortions. This result withstands a number of extensions, like the introduction of a short‐sale constraint for individuals or the inclusion of a labour income tax.