PAYG pension in a small open economy

PAYG pension in a small open economy
Yoo, Ilho
Pay-As-You-Go pension; Redistribution; Small open economy
Issue Date
Series/Report no.
KDI Working Paper Series;06-08
In a recent paper (2006), Pestieu showed that the optimal payroll tax rate for the PAYG pension in an open large economy should increase as number of countries increases. This rather counterintuitive result ?increasing the factor mobility makes redistribution easier?depends on a crucial assumption of the only one tax ; payroll tax. In this paper, analysis of the optimal PAYG pension in the small open economy setting is attempted. Under this new situation, it is shown here that the standard result of trade-off between equity and increase in the capital mobility could be restored. In deriving such result the assumption of variable labor supply plays an important part.
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