Pension reform and economic performance under imperfect capital markets

We consider an overlapping generations model where heterogeneous agents take decisions on consumption and investment in education under the assumption of imperfect capital markets. We study how the introduction of a pay-as-you-go arid of a fully funded pension scheme affects output and lifetime opportunities, and then analyse the impact of a pension reform. The standard neutrality result for fully funded pension schemes does not hold in this framework. We establish the conditions under which a fully funded scheme is associated with a higher investment in human capital. We show that the transition path may involve poverty traps.