Publications

In several OECD countries, public pay-as-you-go financed pension systems have undergone major reforms in which future retirement benefit promises have been scaled down. A consequence of these reforms is that especially in countries with a tight tax-benefit linkage, the retirement benefit claims of low-income workers might not even exceed the minimum income guarantee which the government provides the aged. Recently, some German politicians have criticized this likely development because it was unjust that persons who have paid contributions over a long working life end up with no higher benefits than people who have never worked or paid any contributions. However, the government defended the current retirement benefit formula with the argument that every Euro paid as contributions had exactly the same value in generating future retirement benefits. But this logic has been questioned recently, e.g. by Breyer and Hupfeld (2009), since the value of a contributed Euro depends on the life expectancy of the individual, which is positively correlated with annual income. In that earlier paper, we introduced the concept of "distributive neutrality", which takes income-group-specific differences in life expectancy into account. The present paper estimates the relationship between annual earnings and life expectancy of German retirees empirically and shows how the formula that links benefits to contributions would have to be modified to achieve distributive neutrality. We compare the new formula to the benefit formulas in other OECD countries and analyze a data set provided by the German Pension Insurance Office on a large cohort of pensioners to find out how the old-age poverty rate would be affected by the proposed change of the benefit formula. Finally, we discuss other possible effects of a change in the benefit formula, especially on the labour supply of different earnings groups.

In a recent article, Huizinga, Laeven and Nicodème (2008) present a novel model that motivates an extensive empirical analysis of international debt shifting. We point out that the model fails to account for internal debt, and that once internal debt is properly accounted for, the external debt mechanism they propose is not identified in theempirical analysis. We also point out that affiliate specific debt costs reduce affiliate dividends. When this is implemented in the model, their regression equation can only be derived under the very restrictive assumption that effective tax rates on dividends are the same in all countries.

A problem of Parallel Contests is raised and modeled. The equilibria in final situations of parallel contests are analyzed and characterized and the behaviours of contestants with different abilities parameters are explained. Given that the values of the prizes in the two contests are different, in equilibrium a group of strong players prefer entering into the contest with a higher prize. However, except the group of stronger ones, in equilibrium others will enter into both contests because they obtain equal expected revenue from the two contests, though these weak ones do not have equal probabilities to enter into the two parallel contests. Under the condition of rationalizability, this paper characterizes the respective distributions of contestants abilities in the two parallel contests, proves the existence of the equilibrium in parallel contests and completes the analysis of the parallel contests from the perspective of contestants.

We provide a direct test of the role of social preferences and beliefs in voluntary cooperation and its decline. We elicit individuals cooperation preference in one experiment and use them as well as subjects elicited beliefs to make predictions about contributions to a public good played repeatedly. We find substantial heterogeneity in people s preferences. With simulation methods based on this data, we show that the decline of cooperation is driven by the fact that most people have a preference to contribute less than others. Belief formation and virtual learning do not contribute to the decline of cooperation.

We set up an OLG-model, where households both choose human capital investment and decide on investing their endogenous savings in a portfolio of riskless and risky assets, exposing them to (aggregate) wage and capital risks due to technological shocks. We derive the optimal public policy mix of taxation and education policy. We show that risks can be efficiently diversified between private and public consumption. This results hinges on that the government can apply a wide set of instruments, including differentiated wage and capital taxation. We also show that for sufficient risk aversion the (Northern) European way of relying on progressive wage taxation and granting education subsidies is an optimal response to wage and capital risks.

We develop a model of education where individuals face educational risk. Successfully entering the skilled labor sector depends on individual effort in education and public resources, but educational risk still causes (income) inequality. We show that in a Second-best setting improving quality of education, i.e., the probability of success, by public funding of the educational sector matters more than granting direct income transfers from skilled workers to unskilled ones. Thus, ex ante insurance is more important than ex post income redistribution. These results are even strengthened, in case (distortionary) skill-specific taxes are available.

We study human capital accumulation in an environment of competitive search. Given that unemployed workers can default on their education loans, skilled individuals with a larger debt burden prefer riskier but better paid careers than is socially desirable. A higher level of employment risk in turn depresses the skill premium and the incentives to invest in education. The equilibrium allocation is characterized by too much unemployment, underinvestment by the poor, and too little investment in skill-intensive technologies. A public education system funded by graduate taxes can restore efficiency. More generally, differences in education funding can account for cross-country variations in wage inequality.

The interregional mobility of high skilled workers might induce an underinvestment in local public higher education when sub-federal entities independently decide on education expenditures to maximize local output. This well-known result is due to interregional spillovers and provides a justification for coordinated education policy or rather a federal intervention. However, things might change completely when taking into account the interregional mobility of students. Now, local education expenditures not only affect labor migration (through wage differentials) but also student migration flows. The model in this paper then shows that local output maximization does not necessarily imply underprovision of higher education, since regions now have an incentive to attract students as future human capital. The stay rates of graduates in equilibrium and the sensitivity of wages to migration are key determinants of local policy. Furthermore, results depend on local government objectives or rather the weighting of natives relative to foreigners. Therefore, the paper also considers natives preferred local policy.