The PAYG system and the optimal redistribution instrument in an overlapping generation model

Wiley Online Library. 2016.

Using a two-period overlapping generation (OLG)model, this article seeks to identify the optimal redistributionpolicy instrument in terms of aggregate welfare when agentsdiffer according to their labour condition. We use five policyspecifications: (i) early redistribution to the young informalgeneration; (ii) late redistribution to the informal old genera-tion; (iii) a mix between early and late redistribution;(iv) redistribution from the current formal young generationto the current formal old one; and (v) a non-redistribution sce-nario. With inelastic labour supply, we show that transferring tothe young performs better as a redistribution policy. This resultis robust across different parameter values.