De Economist

, Volume 162, Issue 3, pp 247–262

Pension Reform, Factor Mobility and Trade with Country-Specific Goods

Article

Abstract

This paper studies the effects of pension reform in a two-country model with country-specific goods. It shows that in the case of dynamic efficiency, a switch from a pay-as-you-go to a more-funded pension scheme leads to an inflow of labour to the reforming country. Reallocation of capital depends on the degree of substitutability between goods produced in the countries. If the goods produced in the countries are substitutes (complements), capital stock grows (declines) in the reformed country relative to the neighbouring country. Social security reform makes goods produced in the reformed country cheaper; this has an additional negative effect on the old generation in the reformed country, but compensates the old generation in the neighbouring country with cheaper imports due to a reduction in the tax base arising from emigration.

Keywords

Pension reform Mobile production factors International trade Elasticity of substitution Race to the bottom Spillovers 

JEL Classification

F21 F22 H55 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of Econometrics, Faculty of Mathematics and InformaticsVilnius UniversityVilniusLithuania
  2. 2.Economics DepartmentBank of LithuaniaVilniusLithuania
  3. 3.Department of EconomicsVerona University Via dell’Artigliere 19VeronaItaly

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