We study Pareto optimal policy reforms aimed at overhauling retirement financing as an integral part of the tax and transfer system. Our framework for policy analysis is a heterogeneous‐agent overlapping‐generations model that performs well in matching the aggregate and distributional features of the U.S. economy. We present a test of Pareto optimality that identifies the main source of inefficiency in the status quo policies. Our test suggests that lack of asset subsidies late in life is the main source of inefficiency when annuity markets are incomplete. We solve for Pareto optimal policy reforms and show that progressive asset subsidies provide a powerful tool for Pareto optimal reforms. On the other hand, earnings tax reforms do not always yield efficiency gains. We implement our Pareto optimal policy reform in an economy that features demographic change. The reform reduces the present discounted value of net resources consumed by each generation by about 7 to 11 percent in the steady state. These gains amount to a one‐time lump‐sum transfer to the initial generation equal to 10.5 percent of GDP.

We analyze optimal pension systems relying on simple policy instruments in a lifecycle environment which admits endogenous decisions of how much to work as well as when to retire. The optimality in this context means the highest welfare that can be achieved within a restricted set of instruments, while keeping the total cost of the pension system unchanged. The policy instruments we consider are the optimized retirement benefit functions modeled after a stylized version of the current US Social Security.

The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such fluctuations. Adverse selection ensures that the volume of trade falls when collateral values fall. Without reputation, the equilibrium has separation, adverse selection is quickly resolved, and trade volume is independent of collateral value. With reputation, the equilibrium has pooling and adverse selection persists over time. The equilibrium is efficient unless collateral values are low and originators' reputational levels are low. We describe policies that can implement efficient outcomes.

We incorporate a search-theoretic model of imperfect competition into a standard model of asymmetric information with unrestricted contracts. We characterize the unique equilibrium and use our characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show that the relationship between an agent’s type, the quantity he trades, and the price he pays is jointly determined by the severity of adverse selection and the concentration of market power. Therefore, quantifying the effects of adverse selection requires controlling for market structure. We also show that increasing competition and reducing informational asymmetries can decrease welfare.