We Construct a general equilibrium model in which a pay‐as‐you‐go social security system can be adopted and sustained as a political and economic equilibrium. We alalyze the welfare implictions of this system and compare general equilibrium welfare measure to the commonly used notion of actuarial fairness.

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. This implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility. A key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market.

The policies used by Britain to finance World War II represented a dramatic departure from the policies used to finance earlier wars and were very different from the policies used by the united states during the war. Following Keynes's recommendations, Britain taxed capital income at a much higher rate than the United States during the war and for much of the postwar period. We analyze quantitatively the policies designed by Keneys using an endogenous growth model and the ncoclassical growth model. We also evaluate the implications of tax‐smoothing policies. We find that the welfare costs of Keynes's policies were very high relative to a tax‐smoothing policy and argue that Britain's poor macroeconomic performance in the early postwar period is a consequence of the high tax rates levied on capital income.