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Sem 4 > Public Sector > Flashcards

Public Sector Flashcards

1
Q

What is a pure public good?

A
  • Non-rivalry in consumption
  • Non-excludable
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2
Q

What are three reasons a correlation may be spurious?

A

Reverse Causality
Chance
Omitted Variable

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3
Q

What is a regression discontinuity design?

A

Compare statistical units close to a cut-off, as they should be very similar in terms of background characteristics.

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4
Q

Why can providing public goods through the market be inefficient?

A

Because there are externalities, the free rider problem.

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5
Q

What does the space between indifference curves represent?

A

The Pareto optimal allocations, if both increase spending they would be better off.

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6
Q

When do difference curves show efficient provision?

A

When they are tangent to each other.

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7
Q

Is efficient provision always public provision?

A

No

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8
Q

What are the challenges of public provision?

A

Crowd-out
Measurement
Preferences, requires perfect knowledge

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9
Q

What are the pros and cons of contracting out?

A

Good for prices bad for quality

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10
Q

What are the benefits of public education?

A

-Productivity (positive spillovers in productivity and tax revenues)

  • Citizenship (democratic process, reduce crime, settling into society)
  • Credit Market Failures (involvement is expensive without gov.)
  • Failure to maximise family utility (parents may value their current consumption more than their kid’s future )
  • Redistribution (education open to everyone)
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11
Q

How are positive externalities usually internalised?

A

-Price Mechanism (discount private education)
- Quantity Mechanism(mandate certain level of education)

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12
Q

What is a solution to crowding out?

A

-Educational vouchers:
Increases income while forcing family to spend on education. Does not create incentives to spend less on education.

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13
Q

What are the main disadvantages of vouchers?

A
  • Excessive school specialisation
  • Increase in school segregation
  • Inefficient use of government resources
  • Non competitive education market
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14
Q

What are the possible explanation for the relationship between wage and education? What does this imply for policy making?

A
  • Education increases human capital
  • Education acts as a screening device
    If it increases human capital government will want to invest in education, if it acts as screening device then it will not (returns are purely private) .
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15
Q

What did Duflo (2000) do investigating IPRES program in Indonesia? What findings?

A

-Duflo’s study in Indonesia examines school construction effects:
- More schools lead to increase in education and wages.
- Used variations in the program’s intensity across regions (DiD)
-Identification Assumption: there is no time-varying or region specific effects that correlate with the program also used a bunch of controls.

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16
Q

What are the 5 classifications of taxes?

A

Payroll taxes(direct)
Individual income taxes (direct)
Corporate income taxes(direct)
Wealth taxes (direct/indirect)
Consumption taxes (indirect)

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17
Q

What is vertical equity?

A

Those with more resources should pay higher taxes. This means that taxes must be progressive.

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18
Q

What is horizontal equity?

A

Those with the same resources should pay the same taxes

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19
Q

What are the two ways to levy a commodity tax?

A

Ad valorem (per value) , Excise tax (per unit)

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20
Q

What is the difference between a tax deduction and a tax credit? Which is better for vertical equity?

A

Tax deduction reduces taxable income, tax credit reduces the amount of tax.
- Tax credits

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21
Q

What are commodity taxes? What are their advantages/disadvantages?

A

Taxes levied on transactions. Many transactions are public information. BUT, they distort consumer choice.

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22
Q

What are the three rules of tax incidence?

A
  • Statutory burden is not the same as economic burden
  • The market side on which the tax is levied is irrelevant for distribution of tax burden
  • The more inelastic party bears a larger share of the burden
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23
Q

What did the Chetty et al. experiment did investigating tax salience in 2009 do?

A

Modified price tags in US stores to show the price with tax:
- Used a triple difference in differences approach to see if the behaviour of shoppers changed.
- Found that the way in which taxes were displayed changed how much the behaviour of consumers was affected. More salient taxes have a bigger impact, consumers under react to taxes that are not salient.

  • Used Cosmetics products VS other products in same aisle
  • One large store in NC vs other similar stores
  • 3 weeks Feb to March VS 2005 and 6 weeks of 2006
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24
Q

What is the formula for DWL of taxation? What is DWL proportional to?

A

DWL = 0.5elasticity (X/p)*t**2
- To elasticity, the more elastic the more DWL.

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25
Q

When is a commodity tax optimal?

A

When the tax rate across goods is chosen to minimise DWL

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26
Q

What is the Ramsey Rule?

A

MDWL/MR = lambda

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27
Q

What is the inverse elasticity rule?

A

t = (1/elasticity)*lambda

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28
Q

What is the implication of the Ramsey rule?

A

The gov should set up taxes across commodities such that the ratio of MDWL to MR is equal across commodities.

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29
Q

What is the implication of the inverse elasticity rule?

A

Set taxes proportional to the inverse elasticity of demand for that good. Therefore tax inelastic goods more and elastic goods less.

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30
Q

How do you determine the optimal income tax rate?

A

Similar to Ramsey rule, equalise the marginal utility per unit of revenue raised: Mu/Mr = lambda

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31
Q

What did the Eissa(1995) study investigating taxation and women labour supply find?

A

Used a difference in differences approach to see the effect of the Tax Reform Act of 1986 in the USA:

  • Compared above 99th percentile married women earners and 75th percentile women earners. She found that women with higher earnings increase their labor supply after the tax increase.

-Half of the effect comes from the extensive margin.

  • She focused on second earners because they respond stronger to changes in earning opportunities
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32
Q

What is the EITC?

A

Earned income tax credit. The largest anti poverty program in the US, it provides tax refunds to low income households with children.

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33
Q

What does Chetty et al. 2013 do with the EITC?

A

Wants to investigate the effect of taxes on Labour Supply:

  • Uses a proxy of EITC knowledge per zip code by measuring the fractions of individuals who report income to maximise EITC refunds.
  • Exploits differences in EITC eligibility after the birth of a child.
  • High knowledge areas show a big response to this, change their wage earnings.
  • Strong Bunching
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34
Q

What is the most likely reason second earners respond strongly to changes in after-tax wages?

A

Because they likely trade it off with childcare costs.

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35
Q

How does home childcare not being taxed create a tax wedge?

A

Imagine you earn 4000 p.m. with 50% tax. Childcare is 2400 a month so you decided to stay at home. This results in a loss of productivity of 1600.

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36
Q

What are some possible solutions to the tax wedge problem caused by home childcare not being taxed?

A
  • Tax at-home work –> what is market value?
  • Deductible childcare costs –> reduces tax base
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37
Q

What did the paper by Gelbach 2002 investigating public schooling for young children attempt to do?

A

Used 1980 census data to estimate the effect of public school enrolment for a woman’s five year old on labor supply and assistance receipt (subsidies):

  • Finds significant effect on maternal labour supply
  • Free public schoolin = 6-24% increase in supply while reducing public assistance receipt by 10%
  • No effect for women with more than one child younger than 5
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38
Q

How are investments usually taxed in practice?

A

In the form of capital gain, i.e. the difference between purchase and sale price.

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39
Q

What are two reasons why taxes and deductions on capital gains may not actually increase risk taking?

A
  • Less than full tax offsets for losses
  • Redistributive Taxation
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40
Q

What are the two ways investments are taxed? How do they work?

A

taxed on accrual and taxed on relisation.
tax on accrual are paid in each periods on the return earned in this period.
tax on capital gains are paid when the asset is sold.

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41
Q

Why are capital gains taxes often necessary instead of taxes on accrual?

A

Because accrual may be hard to measure, for volatile assets there may be liquidity constraints.

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42
Q

Is tax burden lower with capital gains tax than taxation on accrual?

A

Yes

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43
Q

What are the three income boxes for taxation in the Netherlands?

A

Box 1 is for employment related income
Box 2 is for ownership of limited liability companies
Box 3 is for savings and investment

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44
Q

What are the main arguments against taxing capital gains?

A
  • Capital gains serve as protection against inflation (although could be indexed for inflation)
  • It decreases efficiency of capital transactions (sales of assets are delayed)
  • Discourages entrepreneurial activity
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45
Q

What did the paper by Burman and Randolph (1994) investigating capital gains tax attempt to do? What was their main finding?

A

Use panel data to estimate variation in capital gains tax rates to estimate the effect on capital gains realisations:

  • Most of the response is transitory, individuals just speed up sales they had planned anyway.
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46
Q

What are other kinds of taxes on capital?

A

Estate taxes, gift taxes

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47
Q

What are the main advantages of estate taxes?

A
  • As it is extremely progressive it adds massively to gov. revenue
  • Avoids concentration of wealthy dynasties
  • Keep incentives for heirs to work hard
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48
Q

What are the main disadvantages of estate tax?

A
  • taxing a grieving family is cruel (‘death tax’)
  • since income is taxed, estate tax leads to double taxation
  • sophisticated tax payers can avoid tax
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49
Q

What did Jakobsen et al. (2020) investigating wealth taxation attempt to do? Main findings?

A

Estaimte the effect of wealth taxation on wealth inequality with data from Denmark:
- Used DiD estimation strategies.
- It finds that with wealth tax, wealth formation is reduced by 19% after 8 years for the moderately wealthy, 31% for the very wealthy.

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50
Q

What is property tax?

A

A tax levied on the value of real estate, including the value of land and any structures built on the land. They are a primary source of income for the government.

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51
Q

What are the three school of thought on the incidence of property tax?

A

-The traditional view: tax is levied on two factors, land (inelastic) and buildings(elastic). Land part is borne by landowners. Buildings part may be borne by community if supply of structures more elastic than demand for a community.
- The capital tax view: taxes will chase capital out of town to other jurisdictions decreasing rate of return of capital.
- The benefits tax view: there is no burden to anyone because owners receive local public goods in exchange

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52
Q

What did the Surico and Trezzi paper investigating consumer spending and property taxes do in 2019?Findings?

A

Use Italian property tax reform of 2011 to check consumption patterns of homeowners:
after a temporary redesign of the municipal housing tax system:

  • Used a DiD approach.
  • Leads to large expenditure cuts on the mortgagors
  • taxes on residential properties mainly affect wealthy people, hence having a lower effect on consumption
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53
Q

What is a corporation? How does it differ from a firm?

A

A legal entity owned by at least one shareholder. It comes with limited liability (incorporation), meaning that the owners cannot be held personally responsible for the firm’s obligations.
The limited liability part. For examples self-employed people are firms but not corporations.

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54
Q

Why should we tax firms/corporations and not labor and capital directly?

A
  • Pure profits taxation: corporations with market power will make pure profits and taxing pure profits is not distorting the choice of production factors.
  • Retained earnings: not taxing may lead to delayed payout of earnings to generate lower discounted value of the tax burden.
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55
Q

What is the incidence of corporate tax?

A
  • The demand for goods the corporate sector produces is likely not perfectly elastic, so consumers bear some burden.
  • The rest is passed on to labour and capital:
    - Supply labour not perfectly elastic –> lower wages (some burden)
    - Capital is inelastic in short run, so rate of return on non/corporate capital decreases.
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56
Q

Summarise the paper Djankov et al. (2010)

A
  • it provided cross-country correlations of corporate tax rates and firm investments. Finds corporate taxes reduce investments by firms.
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57
Q

What are the three options firm have to finance investment?

A
  • Use retained earnings
  • Increase debt by borrowing
  • Issue equity
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58
Q

Are dividends and debt both double taxes? Why?

A

No, only dividends. Because debt is more risky.

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59
Q

What did the paper by Heider & Ljungqvist (2015) investigating corporate taxes do?

A

Since higher corporate tax would make using equity to finance more expensive (dividends are taxed debt is not):
- Regressed corporate tax rates on corporate debt levels (DiD) using staggered corporate income tax changes in the US.
-The average corporate tax rate increase of 13% triggers a 4.5% increase in debt, but no such effect for tax rate decreases.

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60
Q

What is the dividend paradox?

A

Given that capital gains tax rate are lower than for dividends why should firms even pay dividends? Two possible exaplenations:
- Agency theory –> investors are willing to live with tax ineffciency in order to get money
- Signalling theory –> investors have imperfect information over firm performance, by paying dividends managers show that firm is doing well.

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61
Q

What does Chett & Saez investigating dividend taxes and corporate behaviour do?(2005)

A

It uses the dividend tax cut of 2003 to explore how lower dividend tax affects dividend payments:
- DiD with taxable and non taxable institutions.
-Documented 20% increase in dividend payments by non financial, non utility publicly traded corporations
- Response was greatest with firms principals whose tax incentives changed
- Shows that principal-agent issues play an important role

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62
Q

What are the two principles to tax international income?

A

Territorial Systems: earnings are taxed in the country in which they accrue
Global System: corporations are taxed in their home country with their global earnings (firms only pay once income is repatriated)

63
Q

What is transfer pricing?

A

The prices with which subsidiaries reimburse each other within the same company

64
Q

What are the arguments in favour of tax reforms?

A

Tax compliance, simplicity and efficiency

65
Q

What are the five ways in which tax rates changes change revenue?

A
  • Direct efffect (increase revenue off fixed base)
  • Gross income effect (individuals seek to generate less of that income)
  • Reporting effect (individuals will seek to reclassify income)
  • Income inclusion effect (make more use of tax-deductibles)
  • Compliance effect (tax evasion increaes)
66
Q

What is Thomas Hobbes view on tax?

A

It would be more fair to tax people on consumption instead of their production

67
Q

What are the advantages of consumption tax?

A
  • Improved capital allocation (less distortion of choices)
  • Fair treatment of savers (because returns on savings are taxed)
  • Simplicity (easier to asses what people buy)
68
Q

What are the disadvantages of consumption tax?

A
  • Vertical disequity, rich people save more than poor
  • Savers and non savers (cannot tax savers which usually are high ability individuals)
  • Transition issues (people already made choices on different rules)
  • Compliance (strong incentive for black market)
  • Cascading (Business buys inputs)
69
Q

What is the main reasons for government intervention in health insurance market?

A

Externalities (me suffirign illness spreads to others)
Asymmetric information (doctor over charge, Patients know more about their risk)
Moral Hazard (patients more risky behaviour cause covered by insurance)

70
Q

What was the affordable care act?

A

An act in the US guaranteeing access to insurance, removes pre-existing condition exclusion, bans health-based pricing.

Subsidised Insurance for low income people

Tax penalty if you do not get insurance

71
Q

What did the paper by Clemens & Gottileb investigating Financial Health incentives do(2014)?

A

Investigate whether physicians’ financial incentives influence health care supply:
- In 1997, Medicare consolidated the geographic regions across which it adjusts physician payments, generating area specific price shocks
- Areas with higher payment shocks experienced higher health care supply and technology difussion
-Small health impacts, but small precision.

72
Q

What did the paper Finkelstein et al. (2012) investigating health insurance do?

A

Did an experiment in Oregon to using a lottery system to give out free health insurance to low income households:
- They did this to see the impact of health insurance on health.
- Group selected was more likely to have health insurance
- Higher health care utilisation
- Lower out of pocket medical expenditures
- Better self reported physical and mental health

73
Q

What did the paper Clemens and Gottlieb investigating health sector prices (2017) do?

A

Wanted to investigate if Medicare would affect private sector prices:
- Used data from Medicate claims, aggregating by area and year. There were two possible sources of variation, geography and surgical and non. surgical medical care. - -Found that the two prices follow each other closely. Private prices follow Medicare’s lead.

74
Q

What are the basics of Dutch health insurance?

A

It is mandatory for everyone, immigrants should get it within 4 months. If you don’t you pay a fine after 3 and 6 months, then you are automatically enrolled.

75
Q

What is the basic package of health insurance in the Netherlands?

A
  • Identical across companies and covers all common medical procedures.
  • Request for basic package cannot be turned down
  • Does not cover dental package
76
Q

What did the paper by Hayen et al. (2021) investigating health insurance do ?

A

They looked at health care spending in the Netherlands after a change in the system in 2006 from no claim-refund to deductibles:
- Used average simulated price as an instrumental variable.
-Found that expenditure decreased after the reform.
- Showed that behavioural responses need to be taken into account when designing health insurance.

77
Q

What did the paper Douven et al. (2015) investigating reimbursement schedules do?

A

Looked at reimbursement schedule for mental health conditions in NL starting 2008:
-Compared two groups of providers of mental health services: providers with employees and self-employed providers. They wanted to estimate the distribution function of services provided separately for the two groups.
-Providers treat patients longer to reach the higher threshold of payment.
- Results in cost increase for patients

78
Q

What does stability mean in the context of a voting process?

A

The ability of the voting process to eventually reach a settled conclusion, not jumping around between alternatives.

79
Q

What does the social choice theory do?

A

Takes a given set of individual preferences and tries to aggregate them into a social preference.

80
Q

What are the requirements a collective ranking should satisfy according to Arrow (1951)?

A
  • Independence of Irrelevant Alternatives
  • Non-Dictatorship
  • Pareto Criterion (unanimity should prevail when it arises)
  • Unrestricted Domain
  • Transitivity
81
Q

What is May’s Theorem?

A

It applies to the case of two alternatives. It states that in this scenario the only collective decision making process that satisfies all conditions below is the Majority Rule.

  • Anonymity
  • Neutrality
  • Decisiveness
  • Positive Responsiveness
82
Q

What is Condorcet Winner?

A

When there are more than two alternatives to vote for, the option that defeats all others in pairwise majority voting i s called a Condorcet Winner.

winner x> y , y being any other option

83
Q

What is the difference between single-peakedness and single crossing Median Voter Theorem?

A

Single-peakedness refers to the median of the voters’ preferred options
Single crossing refers to the preferred option of the median voter

84
Q

What is the median voter theorem’s relationship with honesty and efficiency?

A

It does not depend on honesty as the median voter has no incentive to misrepresent their preference.
It does necessarily produce an efficient outcome as it depends on the median voter’s preference being efficient.

85
Q

Does median voter theorem work with multidimensional voting?

A

No

86
Q

What is possible when there is no Condorcet winner?

A

Agenda manipulation, which means that the order of voting can change its outcome.

87
Q

What is the Condorcet Paradox?

A

Intransitivity of group preferences can arise even when individual preferences are transitive.

88
Q

What are common alternatives to Majority Rule? Describe them.

A
  • Plurality Voting (1 first , 0 others)
  • Approval Voting (1 to all u want)
  • Borda Voting ( Score from highest to lowest)
  • Runoff Voting (only first place)
89
Q

What are the drawbacks of the alternatives to majority voting?

A

Borda: irrelevant alternatives influence outcome
Approval voting: fails to select Condorcet winner
Runoff voting: fails to select Condorcet winner and can violate positive responsiveness
Plurality voting: fails to select Condorcet winner

90
Q

What is the Alabama paradox? How could it be solved?

A

The Alabama paradox is associated with the apportionment problem. Apportionment solutions my involve fractions, but the number of representative has to be an integer. Alexander Hamilton proposed a solution; allocating a contested seat to the party with the largest fractional part.

91
Q

What is Arrow’s impossibility therom?

A

Impossible to find the perfect voting system. None can deliver in every circumstance.

92
Q

What is the paradox of not voting? What is the classical interpretation of it?

A

Despite small impact and existing cost, many people put up with a lot in order to vote.
That voters do not act strategically, and their decision to vote is independent of other strategic actions.

93
Q

What is the criticism of the classical interpretation of the paradox of not voting?

A

Voters condition their vote on the viability of candidates.

Voter turnout is inversely related to cost of voting. And also correlated with education and income level.

94
Q

How do leaders motivate their followers to vote in the mobilisation models?

A

Social pressure between followers.
AND
1. Sense of Civic duty
2. Altruistic or ethical concerns

95
Q

What does office motivation mean in the Downsian Model?

A

Case in which either both candidates are win motivated or both are vote motivated.

96
Q

Do equilibria often exist in Multidimensional Voting?

A

No

97
Q

What are professional lobbyists?

A

People whose business is trying to influence legislation on behalf of a group or individual who hires them. They are ‘rent seeking’, do not produce economic income flow but rather try to seize it.

98
Q

What is the pure strategy equilibrium in rent seeking games?

A

There is no pure strategy equilibirum

99
Q

What is complete dissipation in rent seeking games?

A

The total sum burned is V, each player burns V/n

100
Q

Social Cost of Monopoly

A

Output below competitive level -> higher prices , DWL.
Needs to be defended, involves lobbying rent-seeking.

101
Q

What are the important government budget definitions?

A

Debt financing: ∆B = G + iB - T - ∆M
Budget deficit : G + iB - T
Primary deficit : G -T
stablle public debt ∆B = 0

102
Q

Variables as a share of GDP

A

b = B/Y debt ratio
g = G/Y expenditure ratio
t= T/Y

103
Q

Change in Deficit ratio vs Change in debt Ratio

A
  1. ∆B/Y = g +rb -t
  2. ∆b = ∆B/Y -by
104
Q

Debt ratio

Linear Difference Equation

A

∆b = g - t + (r-y)b

combinig the two above

105
Q

How do you find the Steady-State Debt ratio?

A

need to be in balance, ∆b = 0
Then solve for
b* = (g-t)/y-r

y-r real income gorwth minues real interest rate

All variables are growing at the same rate as y.

g-t primary deicit

106
Q

Debt dynamics

A

for given primary deficit g -t
Debt unstble if r>y
(b>b* debt explodes
b<b* debt implodes)
stable if r<y

107
Q

How to restore equilibrium?

A

Increase primary surplus, shift in the line
Change r-y , rotation of line (gradient different)

108
Q

Money financing

A

∆b shifts down, seignorage avoids increasing primary surplus but -> inflation

109
Q

Deficit Ratio Dynamics

A

d = g - t + ib
d* = (y+π)b*
if r < y : d * converges

if r > y : d * not stable

110
Q

What is the Neoclassical view on debt-financed government consumption?

A

It will lead to an ever increasing interest rate crowding out capital. In the LR it leads to lower utility for future generations.

111
Q

What is Intergenerational Redistribution

A

r > y , unsustainable debt repaid with taxes last gen.
r < y debt never have to paid off roll over next gen.

112
Q

What is Ricardian Equivalence?

A

Foward-looking. tax-cut today, increase tax tommorow
People just save.

113
Q

What are the problems with the New classical view/Ricardian equivalence?

A
  • Myopia: not all think far ahead
  • If burden of tax will fall on next gen, who cares , spend tax cut
  • borrowing constraints, not enough money to achieve consumptions optimal, spend tax cut
114
Q

Keynesian View

A

Primary deficits in the short run can boost output and employment.

115
Q

Modern Monetary theory

A

Monetary policy unreliable for output stabilisation (Fiscal policy is)
Countries with own currency, no need to default on debt ( print away)
Tax control inflation and debt payments

116
Q

Pay as you go

A

current workers pay pension of old workers

117
Q

Funding

A

wokrers save during their life tu fund future spending

118
Q

How much to save ?

A

it depends how long you live and how much you want to spend, the real interest rate r and how early you start saving

119
Q

What are the three measures of passing away and surviving?

A
  • qx: probability of death at age x within one year
  • px : probability of survival at age x for at least one year (px + qx = 1)
    x-65px : probability of survival at age x for at least one year, conditional on being alive at age 65.
120
Q

Longevity

A

probability of death uncertain, increasing as u get older
What value should you set for T?

121
Q

Longevity risk

A

might outlive assets, spent too much before death -> then your fucked

122
Q

capital market risk

A

same thing, miscalculate returns (what value for r?) -> fucked

123
Q

Life Annuinity

A

Insurance company takes on both longevitig and capital market risk , gives you money regardless

124
Q

Insurance Zero profit , why ?

A

Assume: whole pop. participates and competition no mark-up on annuity

if people die sooner, money redistributed to customers (higher annuity)

125
Q

Mortality premium

A

Not available for individuals in financial market. It is the difference between annuity rate of return and market rate of return. someone with an average life expectancy is better off with an annuity than a individual pension investment.

126
Q

Adverse selection

A

People with low life expectancy are not likely to buy annuity.

127
Q

Consequence of Adverse Selection

A
  • “good risk” leaves the market
  • annuity payments decrease
  • market might break down

lower annuity payment, less people , even lower payments ecc

128
Q

Money’s Worth

A

ratio of expected value of annuity payments, to capital paid for it

seem to provide good value

129
Q

Annuity Puzzle (not many people buying annuities)

what explains low annuity holdings ?

A
  • Adverse selection
  • Bequest motive: want to pass on wealth
  • Precaution: keep liquidity in case of health emergency
  • Public pension plans: already have ann.
  • Deleay ann. for high risky returns capital market
  • Investor : Annuity risky depends on life expectancy ; Consumer : riskless get payed until u die
130
Q

PAYG established why ?

A

Economic depression 1930s
WW2 , need to pay pensions immidiately (saving what if no money)

Younger generation paid for older

131
Q

Economic reason for PAYG

A
  1. Market failure (adverse selection of annuity, no bonds adjusted for inflation risk)
  2. individual may lack income or wealth to save
  3. Individual failure to save (behavioral biases)
132
Q

What is the replacement rate?

A

The benefit (first payment) as a percentage of the wage income when retiring.

133
Q

DB or DC

A

defined benefit: the benefit rate is fixed
defined contribution: the contribution rate is fixed

134
Q

What three factors determine the PAYG system’s return?

A

depends positively on pop growth n
negatively on longevity gamma
positively on wage growth g

empirical evidence : lower n, higher longevity, wage increase over time

135
Q

Dependency ratio

A

number of people 65+ over the number of people between 25-64

2050 in NL, only 2 young people to support one old

136
Q

internal rate of return

A

The rate of return which equalises the present values of benefits received and contributions paid.

do you get a good deal once u died

is the theoritical interest rate that equalizes the
present value of benefits received and contributions paid.

137
Q

macro economic effects of PAYG

A
  • fall in fertility
  • lower savings
  • less labour supply
  • loss of lifetime income
138
Q

fertility rate

A

as GPD increase , fretility rate decrease.
no need to make loads of kids to look after you

139
Q

savings

A

PAYG lowers the need of savings, this causes
for large economies less capital formation less investments.
for small open econmies issue less severe

140
Q

Labour supply

A

PAYG
people can perceived as contributing to their future pension ,
or perceive it as income labor tax (distortionary)

141
Q

Life time income

A

Aaron condition: relates return from funded plan r , and PAYG n + g , latter attractive if higher than r .
It is negative for dynamically efficient economy : r > n + g

most economies are efficient, so loss in lifetime income

142
Q

Bismarckian plan

A

Relatively large public pension plan.
pension related to your contributions in your career, insurance rather than income redistribution. pension floor for people without income

143
Q

Beveridgean plan

A

Relatively Small public pension plan.
Flat rate to guarantee minimum standard of living.
Intergenerational redistribution (contributions proportional to earnings)

have higher IRR, poor individuals pay lwr cntrbtns get higher benefits

144
Q

PAYG rate of return

A

on average 2.5%, rising dependency hurts PAYG

should we switch to funded system

very volatile replacement rates

145
Q

Savings rate of return

A

although capital market risk and longevity risk, return is better

146
Q

What is the replacement rate?

A

The ratio of pension income over last wage (usually individual pension plans aim for 70%)

147
Q

Why is the ultimate replacement rate uncertain for individual pension plans?

A

Capital market risk:
high uncertainty, high and low investment returns, high volatility,
wage path uncertainty

148
Q

Portfolio Approach

A

use risk diversification, PAYG , funded private sector plan, private savings

149
Q

What is the issue with PAYG plans in the Western World today?

A

The ageing society leads to generational conflicts

150
Q

Transition Burden of pension plan

A

Generational conflicts, one gets benefits other double burden.

151
Q

What routes can be taken to reform PAYG plans?

A
  • Parametric reform
  • Fundamental reset:
152
Q

What is the continuity assumption of RDD?

A

X- axis has to be continuous

153
Q

What is a necessary assumption for DiD?

A

Parallel-trends assumption. It is untestable.

154
Q

How does risk aversion affect the Portfolio approach?

A

Higher risk aversion leads to lower w

Sem 4 (5 decks)

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