When the size of the maximum pension benefit is fixed, the cost of the pension scheme to policymaker and ultimately to taxpayers is affected by changes to the pension taper rate, providing an additional channel through which the means-testing can affect welfare outcomes. [...] The pension received is based on the formula pm − ϕa if 0 < a < pm3 3 /ϕp(a3) = 0 otherwise, 10 where pm is the maximum pension that can be received and ϕ is the taper (withdrawal) rate at which the pension is withdrawn as the asset level increases, and where a3 the agent’s asset holding at the beginning of period 3.7 The inclusion of the age pension system requires amendments to the budget const. [...] The firm is a price taker for both labor and capital and chooses the level of labor and capital demand to satisfy the profit maximising conditions FK(K,H,A) = r + δ, (22) FH(K,H,A) = w, (23) where FK() and FH() denote the marginal products with respect to K and H, w is the market wage rate per efficiency unit of labor, r is the prevailing interest rate, and δ is the depreciation rate of capital. [...] To estimate the vector of realisations and the trans- 12We restrict the data to households in the survey in which the main income earner is a full time worker. [...] As described in Section 2 and following the standard practice in the literature, we assume the temptation function to be proportional to the commitment utility: v(c, l) = λu(c, l), (32) where the value of λ determines the strength of the temptation function and the cost of self-control.
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Table of Contents
- Introduction 3
- Self-Control Preferences in a Simple Life-Cycle Model 9
- Gul and Pesendorfer Preferences 9
- A Simple Life-Cycle Model 10
- Model Structure 10
- Introducing a Means-Tested Pension 12
- Model Simulations and Discussion 13
- Summary 17
- Dynamic Stochastic Equilibrium Model 18
- Households 19
- Demographics and Distributional Measure of Households 19
- Time Endowment and Labor Productivity 20
- Preferences 20
- Household Problem 21
- Production 22
- Government 22
- External Sector 23
- Equilibrium 23
- Calibration of Benchmark Economy 25
- Quantitative Analysis of Self-Control Preferences and Taper Rate Dynamics 30
- Implications of Increasing Self-Control Temptation 30
- Life-Cycle Effects 30
- Macroeconomic Implications (with Benchmark Taper Rate) 34
- Implications of Increasing Self-control Costs in Combination with Alternative Taper Rates 36
- Macroeconomic Implications 36
- Welfare Implications 39
- Temptation over Both Consumption and Leisure 41
- Model Extension 41
- Welfare Effects 41
- Life-Cycle effects 42
- Conclusion 44
- Calibration 51
- Labor Efficiency and Shocks 51
- Progressive Income Taxes 54
- Computational Algorithm 54
- Further Results for Section 4 55
- Macroeconomic Outcomes 55
- Life-Cycle Labor Supply Effects 57
- Distributional Welfare Effects 59
