On Pessimism and Optimism by Forward Looking Agents and the Need for Social Security

RIT Economics Department Working Paper No. 17-1

23 Pages Posted: 5 Jan 2017

See all articles by Amitrajeet A. Batabyal

Amitrajeet A. Batabyal

Rochester Institute of Technology

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: January 3, 2017

Abstract

We study whether pessimism and optimism about the future by forward looking agents provides a rationale for social security. We first distinguish between an agent’s true and pessimistic preferences and then analyze whether this agent’s level of saving depends on the pessimism parameter (π) and how welfare measured by the agent’s true preferences depends on π. Next, we examine whether it is possible for pessimism to increase the agent’s true utility and then show that this kind of pessimism does not provide a rationale for social security. Moving on to optimism, we study the need for a pay-as-you-go (PAYG) social security system when the agent is optimistic about the generosity of the PAYG system. This optimism is modeled with a parameter (ω). In this setting, we first study the impact that an increase in ω has on the agent’s saving and then examine whether this agent’s welfare increases or decreases in ω. Finally, we show that this kind of optimism does not justify the presence of the PAYG social security system.

Keywords: Optimism, Overlapping Generations, Pessimism, Saving, Social Security

JEL Classification: H55, R28

Suggested Citation

Batabyal, Amitrajeet A. and Nijkamp, Peter, On Pessimism and Optimism by Forward Looking Agents and the Need for Social Security (January 3, 2017). RIT Economics Department Working Paper No. 17-1, Available at SSRN: https://ssrn.com/abstract=2893187 or http://dx.doi.org/10.2139/ssrn.2893187

Amitrajeet A. Batabyal (Contact Author)

Rochester Institute of Technology ( email )

Department of Economics, RIT
92 Lomb Memorial Drive
Rochester, NY NEW YORK 14623-5604
United States
5853134063 (Phone)
5854755777 (Fax)

HOME PAGE: http://people.rit.edu/aabgsh

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446091 (Phone)
+31 20 4445611 (Fax)

Tinbergen Institute

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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