Knowledge that Transforms

This paper examines the impact of Social Security on national saving and individual welfare in the presence of realistic capital market imperfections--market failure in the private provision of annuities and restrictions on borrowing against anticipated future wages. The introduction of Social Security increases lifetime welfare and reduces national saving if borrowing restrictions are absent. However, the increase in individual welfare is reduced, and in some cases eliminated, when borrowing constraints are taken into consideration. The substantial difference suggests the importance of reexamining the proportional payroll tax finance of Social Security.

This paper considers the effect of precommitment in contests where the rivals expend effort to win a prize. With two asymmetric players, it is found that the favorite will commit effort at a higher level than that in a Nash equilibrium without commitment, and the underdog at a lower level. With many players, the absence of an odds-on favorite among rivals is sufficient to ensure overcommitment by any one player. Applications to sports, oligopoly, and rent and rent seeking are discussed.

An important stylized fact about labor markets is that workers with longer seniority with their current employer have higher earnings than other workers with the same total labor market experience. This study shows that the measured positive cross-sectional return to seniority is largely a statistical artifact due to the correlation of seniority with an omitted variable representing the quality of the worker, job, or worker-employer match. The implication is that earnings do not, in fact, rise very much with seniority.

[Exchange rate management is possible only if the government pursues consistent monetary and fiscal policies. We construct a model in which the real consequences of exchange rate management depend on the precise time pattern of these policies. We study the constraints on feasible policies and the comparative dynamics of disinflation by means of exchange rate targetting. Our theoretical results are consistent wit exchange rate-managed disinflation attempts in Argentina, Chile, and Israel.]