Kiel Working Papers, Kiel Institute for World Economics
No 918:
Intergenerational Redistribution with Asymmetric Information: the Case of Non-Observable Savings
Oliver Lorz
Abstract: This paper analyzes intergenerational redistribution in a
2-period overlapping-generations model of a representative democracy. The
model incorporates redistribution between generations and redistribution
within generations, allowing for heterogeneous labor productivities in the
working generation. In each period, the government decides about
redistributive transfers to maximize the aggregate utility of the members
of both generations. There is asymmetric information between the government
and the private sector: The government can only observe labor incomes but
not individual labor supply or individual productivities. In addition,
individual savings and capital incomes are not observable for the
government. It is shown that the political economy equilibrium is not
Pareto-efficient. Redistribution results in equal consumption levels of
individuals with different labor productivities. This destroys incentives
for individuals with a high labor productivity to earn a higher labor
income than individuals with a low labor productivity.
Keywords: Overlapping generations, redistribution, political economy, asymmetric information.; (follow links to similar papers)
JEL-Codes: E62; D78; D82; (follow links to similar papers)
12 pages, April 1999
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