H.A.A. Verbon

Tax Competition and Redistribution in a Two-Country Endogenous-Growth Model

This paper examines the effects of policy coordinationin a two-country world with endogenous growth and imperfect capitalmobility. Redistribution is financed by a source-based capital-incometax. Comparing the cases in which countries do and do not coordinatetheir fiscal policies, it is shown that redistribution can beinefficiently high if fiscal policies are not coordinated. Thisis because the negative effects of fiscal policy on home savingsaffect economic growth abroad by inducing a decline in foreigninvestment. This externality can dominate the well-known tax-baseexternality.

Cooperation in an Overlapping Generations Experiment

Abstract Recent theoretical work shows that folk theorems can be developed for infinite overlapping generations games. Cooperation in such games can be sustained as a Nash equilibrium. But, of course, there are other equilibria. This paper investigates experimentally whether cooperation actually occurs in a simple overlapping generations game. Subjects both play the game and formulate strategies. Our main finding is that subjects fail to exploit the intertemporal structure of the game. Even when we provided subjects with a recommendation to play the grim trigger strategy, most of the subjects still employed safe history-independent strategies. Journal of Economic Literature Classification Numbers: C72, C92, D90.

Aging and political decision making on public pensions

In this paper decision making on public pensions in a representative democracy is modeled within the framework of the well-known two-overlappinggenerations (OLG) general-equilibrium model with rational expectations. The model is used to analyze the effects of aging on the economy in general and on the evolution of public pension schemes in particular, where aging is interpreted as a combination of a decrease in the rate of population growth and an increase in the political influence of pensioners. Analytical results are derived for the long run as well as for the short run by the method of comparative statics and comparative dynamics respectively. It appears that an increase in transfers to the old is not guaranteed if due to aging their political power increases.

Capital mobility, wage bargaining, and social insurance policies in an economic union

In a two-country model with mobile capital we analyse decentralized social insurance policies. These policies are a compromise between the preferences of workers and capital owners. Due to wage bargaining, worker-based social insurance contributions are borne by capital owners. These contributions affect the profitability of investment, and consequently the direction and size of capital flows. Countries will take account of these effects in determining social insurance policy. Noncooperative decision making results in tax competition and an underprovision of social insurance. In addition, increasing economic integration, represented by increasing capital mobility, could imply a divergence of social insurance levels in the two countries.

Decision Making on Pension Schemes Under Rational Expectations

In this paper the formation of expectations during decision making processes on pension schemes is the main focus. An overlapping generations model is used where politicians control the tax-transfer system and the young determine savings. No generation of decision makers is committed to previous decisions. It appears that the outcome in the stationary state depends on the efficiency of the tax-transfer system compared with savings and on the preferences of politicians relative to young individuals with respect to the division of endowments between young-age and old-age consumption. One of the main conclusions is that if the parameters of the system are constant the stationary state enters within a finite time interval. So, if the system is initially outside the stationary state, the decision makers can calculate the path of taxes and savings towards the stationary state. This feature is also used to determine the effects of a demographic change.

Ageing, migration and endogenous public pensions

Abstract This paper analyses migration behaviour of mobile workers in reaction to population ageing. We show that the conventional wisdom that a decrease in fertility will lead to a rise in wages, and thus to an inflow of immigrants that mitigates the adverse effects of ageing on public pensions, may not hold if labour is heterogeneous. Moreover, we demonstrate that if public pensions are endogenous, i.e., if ageing leads the elderly to successfully lobby for higher taxes, it may take several generations before a steady-state is reached and the initial migration flow may be opposite to the steady-state migration.

Labour Mobility and Decision Making on Social Insurance in an Integrated Market

In a two-country model the consequences of labour mobility on social insurance levels are studied. There are two groups of workers, one with a high risk and the other one with a low risk of being nonemployed. In both countries the decision-making function on social insurance is some weighted average of the expected utilities of both groups. In case low-risk workers are much more mobile than high-risk workers, it can be concluded that labour mobility does not necessarily have a downward effect on social insurance. In that case coordination of decision making would not improve the levels of social insurance.

Expectations on pension schemes under non-stationary conditions

Abstract The way expectations are treated in models concerning pension schemes in generally decisive for their predicted development. In this letter we show how these expectations can consistently be modeled in a dynamic context, without having to rely on adhoc assumptions.

The poverty game and the pension game: The role of reciprocity

Abstract We examine the force of the reciprocity norm in gift giving experiments in which mutual gift giving is efficient but gifts are individually costly. Our main result is that we find almost no evidence for reciprocity. Gifts supplied are unrelated to gifts received. This applies equally to the Poverty Game (player 1 gives to player 2, player 2 gives to player 1) and the Pension Game (player 2 gives to player 1, player 3 gives to player 2, player 4 gives to player 3, etc.). Nevertheless, we do find substantial levels of gift giving. Furthermore, these levels are higher in the Pension Game than in the Poverty Game. PsycINFO classification: 3020; 3040

The dynamics of government debt

This paper deals with decision making on government debt in an overlapping-generations model of a small open economy. The government is concerned with the utility of current generations only, but it explicitly takes the effect of current decisions on future government decisions into account. Fiscal policy is constrained by viability conditions. An analytical solution for the time paths of debt and taxes is derived. Decreasing as well as increasing debt levels can be obtained. Conditions are given determining which of these patterns prevails. Finally, the effects of (anticipated and unanticipated) shocks in the exogenous parameters on the time path of government debt are analyzed.