The Optimal Size and Progressivity of Old-Age Social Security
Almost every public pension system shares two attributes: earning deductions to finance benefits, and benefits that depend on earnings. This paper analyzes theoretically and empirically the trade-off between social insurance and incentive provision faced by reforms to these two attributes. First, I combine the social insurance and the optimal linear-income literature to build a model with flexible pension contribution rate and benefits' progressivity that incorporates inter-temporal and inter-worker types of redistribution and incentive distortion. The model is general, allowing workers to be heterogeneous on productivity and retirement preparedness, and exhibit present-focused bias. I then estimate the model by leveraging three quasi-experimental variations on the design of the Chilean pension system and administrative data merged with a panel survey. On the incentive distortion cost of reforms, I find that taxable earnings respond to changes in the benefit-earnings link, future pension payments, and net-of-tax rate, which increases the costs of reforms. On the redistributional value of reforms, I find that lifetime payroll earnings have a strong positive relationship with productivity and retirement preparedness, and that pension transfers are effective in increasing retirement consumption. Therefore, there is a large inter-worker redistribution value through the pension system. Overall, there are significant social gains from marginal reforms: a 1\% increase in the contribution rate and in the benefits' progressivity generates social gains of 0.08\% and 0.29\% of the GDP, respectively. The optimal design has a pension contribution rate of 17\% and focuses 42\% of pensions' public spending on workers below the median of lifetime earnings.
The Missing Response to Taxes: Informality
Using a natural experiment generated by the Chilean pension system, I estimate labor responses to payroll taxes. The variation affected high and low-income workers in the same magnitude. I found that vulnerable workers -low-income, less attached to the formal sector- exhibit a large elasticity, while high-income workers show no response. In addition, middle-age workers are the ones that respond more. This pattern of the elasticity of taxable income has important consequences for pension systems design.
The Dynamics of Financial Advice (with Joaquin Poblete)
Financial advice, stock recommendations specifically, is a repeated cheap-talk game. Advisors have private soft information that they give to investors through recommendations. We show that in a repeated cheap-talk game, an advisor with private information about stocks will always send informative messages no matter how biased and how low her reputation is. These recommendations will be more informative during booms than busts of the economic cycle. Also, due to short-sell restrictions, recommendations are over-optimistic, and sell recommendations are more informative. These findings provide a novel explanation for empirical regularities of stock recommendations and postulate new, yet untested, empirical predictions.