Social Security and Equity Investment in an Economy with Financial Intermediaries and Costly Monitoring

Di Giorgio, Giorgio

This paper aims at extending the analysis of the efficiency of equilibria in an OLG framework with asymmetric information. It focuses on the stationary states of an economy where consumers, firms and financial intermediaries are at work. The process of financial intermediation is affected by ex-post moral hazard due to costly state verification; for this reason, the introduction of social security might be Pareto improving in a market economy even when the economy is dynamically efficient. Moreover, market outcomes are socially inefficient, even when a weaker notion than Pareto optimality is considered. A full characterization of a Constrained Pareto Optimum (CPO) shows that this allocation can never be induced as the result of an optimal policy in a market economy.



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Academic Units
Department of Economics, Columbia University
Department of Economics Discussion Papers, 9596-37
Published Here
March 3, 2011


September 1996