This paper shows how a Pay-As-You-Go (PAYG) pension can emerge in order to solve the self-control problem with respect to the retirement decision. If an agent perceives the potential self-control problem, he can make a time-consistent retirement choice by contributing to a PAYG pension system that does not provide any benefit to an agent who retires early. Therefore, a PAYG pension system can emerge even if it is a dominated saving device since contributing to such a pension system can be a way to constrain the future retirement choice by increasing the cost of early retirement. This paper identifies the conditions under which such an equilibrium emerges and compares this voting equilibrium to the one emerging in an economy populated by agents who do not perceive the potential self-control problem.
|Publication status||Unpublished - 2009|