SFB 303 Discussion Paper No. A - 308
Author: Nerlove, Marc, Assaf Razin, Efraim Sadka, and Robert K. von
Title: Income Distribution and Efficiency: The Role of Social Security
Abstract: In this paper, we consider the interaction of two types of policies, those which are designed to redistribute
income within the current generation and those designed to redistribute income between generations, from
children to parents, as an offset to a binding nonnegativity constraint on bequest. Parents are presumed to be
altruistic so that they value their children's consumption and invest in their childrens' human capital and/or
bequeath physical capital to them. The plan of the paper is as follows: In the next section we lay out a two-
family two-generation model in which parents have identical utility functions, but different incomes. Parents are
assumed to value their children's consumption and to provide for it which they do by investing in their children's
human capital and/or by bequests. Investments in human capital affect the child's future earning power.
section 3, we show that, under an egalitarian social-welfare criterion, a small departure from the laissez-faire
outcome is welfare-improving on both equity grounds and on grounds of efficiency when bequests are
constrained. Section 4 continues the analysis of a globally optimal social security system for particular utility and
human capital/earnings functions by numerical methods. Section 5 concludes.
Creation-Date: August 1990
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