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Pset 3

This document outlines 4 questions for a problem set on an overlapping generations model. Question 1 describes the baseline model with linear technology, no population growth, two types of agents (savers and non-savers), a 3 period life cycle, a social security system, and public debt. Question 2 analyzes the impact of a one-time payroll tax increase. Question 3 considers the payroll tax increase along with an offsetting income tax cut. Question 4 modifies the assumptions about who pays taxes and receives benefits.

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45 views2 pages

Pset 3

This document outlines 4 questions for a problem set on an overlapping generations model. Question 1 describes the baseline model with linear technology, no population growth, two types of agents (savers and non-savers), a 3 period life cycle, a social security system, and public debt. Question 2 analyzes the impact of a one-time payroll tax increase. Question 3 considers the payroll tax increase along with an offsetting income tax cut. Question 4 modifies the assumptions about who pays taxes and receives benefits.

Uploaded by

Neema
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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14.

472 Problem set 3


Spring 2004

Question 1

Set up an olg model with the following characteristics (use similar notation to that in
the handouts) and describe steady state equilibrium:
Technology is linear.
There is no population growth.
The fraction α of the population does no saving, while the rest are standard life-cycle
savers.
People live for 3 periods, working in 2 and being retired in the third.
Labor supply is inelastic.
Utility (apart from a constant for labor disutilities), as a function of the three
consumption levels, satisfies

U [x, y, z ] = xyz

There is a social security system financed by a payroll tax and the interest on assets in
a trust fund.
There is public debt outstanding. The interest on the public debt is financed by a lump-
sum income tax on workers (but not retirees).
There are no government expenditures other than interest on the outstanding public
debt.

Question 2

Assume that the government increases the payroll tax rate by ∆t for one period, using
the revenue to permanently increase the trust fund, with the additional interest earnings
used to lower the payroll tax rate thereafter.
Describe equilibrium in the initial period.
Describe equilibrium after the economy has reached a new steady state.
Question 3

Assume that in addition to the increase in the payroll tax just analyzed, the government
also decreases the income tax in the initial period by an amount chosen to offset a
fraction θ (0≤θ≤1) of the additional payroll tax revenue. The government budget
balances at the new level of public debt outstanding thereafter.
Describe equilibrium in the initial period.
Describe equilibrium after the economy has reached a new steady state.

Question 4

How would your answer to the previous question be different if the nonsavers paid the
payroll tax (and received the retirement benefit) but paid no lump sum income tax to
cover the interest rate and the savers were not covered by social security - neither the
payroll tax nor the benefits.

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