Minimum Effort Incentives in Team Production

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Experimental tests on consumption, savings and
pensions
Enrique Fatás (Lineex and U. Valencia) Juan A.
Lacomba (Lineex and U. Granada) Francisco Lagos
(Lineex and U. Granada) Ana I. Moro-Egido (Lineex
and U. Granada)
Rome 2007
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Motivation (1)

• Reforms of Social Security systems are now one
  of the main issues of most of industrialized
  countries' economic policy agenda.

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A new rule incentives to prolong the working
period beyond the legal retirement age, 65.
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The german parliament increases the retirement
age up to 67 years
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Motivation (1)

• Reforms of Social Security systems are now one
  of the main issues of most of industrialized
  countries' economic policy agenda.
• Why all these reforms? Two main problems
• The ageing of the population threats the
  viability of pay-as-you-go public pension
  systems.
• Besides, pension systems in virtually all OECD
  countries in the mid-1990s made it financially
  unattractive to work after the age of 55.
• Reforms aiming to increase the effective
  retirement age have mainly focussed on the
  reduction of this implicit tax.

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Motivation (2)

• These reforms are named marginally actuarially
  FAIR pension systems and
• They are supposed to be neutral w.r.t the
  retirement decisions.
• Life-time Contributions Pension Benefits.
• However, it could not be the right answer
• It disappears the intergenerational
  redistribution.
• It may tend to undermine the political support
  for the pension system itself.
• It might be no neutral and no effective.

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Motivation (3)
Motivation (3)

• Do there exist alternative reforms to delay the
  retirement decisions?
• LUMP-SUM pension systems
• Fetherstonhaugh and Ross (1999) using a
  questionnaire find that
• More than 75 of the respondents preferred a
  one-time bonus to an increased annuity.
• In the U.S. private industry some type of
  lump-sum benefit has become popular as an
  alternative to annuity payments.
• Fatas, Lacomba and Lagos (2007) find in the lab
  that
• The more concentrated the payments (shifting from
  annuity into lump-sum), the more postponed the
  retirement decisions.

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Objective

• The incorporation of a lump-sum payment as a
  measure to delay retirement decisions requires
  further analysis.
• The impact on the poverty rates of the elderly.
• The aim of this article is twofold
• To test the potential effects of implementing a
  lump-sum payment in a public pension system on
  consumption and saving behavior.
• To analyze how closely the predictions of the
  optimality theory fit the actual behavior of
  subjects in a lab.

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Experimental literature on consumption behavior

• Hey and Dardanoni (EJ, 1988).
• Ballinger et al (EJ, 2003).
• Carbone and Hey (EJ, 2004).
• Brown, Camerer and Chua (2006).
• ---------------- o 0 o ----------------
• Two novel features of our benchmark
• Future income is uncertain with a decreasing
  probability of surviving.
• Two levels of income as worker and as retired.
• This is the first experimental approach to
  examine a dynamic saving-consumption problem in a
  retirement framework.

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Experimental Design

• The experiment consists of at most 30 rounds.
• The higher the round, the lower the probability
  of surviving.
• Subjects receive three different levels of income
  according to a RETIREMENT period
• A constant level of income during each period
  before R.
• A higher lump-sum of income in R.
• From R on subjects receive nothing.
• In each round subjects make only one decision
  how much of their Cash Available to Consume/Save
  in that round.
• Borrowing is not allowed.
• Savings earn no interest.
• Consumption generates points Points
  10vconsumption.

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Experimental procedures

• Experiments were run at LINEEX (Dec, 2006).
• 2 treatments LS10 (20 subjects) and LS15 (19
  subjects).
• In each treatment, subjects played three
  sequences.
• They were paid by one of these three sequences
  (randomly selected).
• 1 h. 40 min. and 27 on average (exchange rate
  125 points 1).

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Results Consumption Decisions -- LS10
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Results Consumption Decisions -- LS15
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Results Saving Decisions -- LS10
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Results Saving Decisions -- LS15
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Results Behavioral Analysis
POOLED POOLED POOLED POOLED BREAK10 BREAK10 BREAK10 BREAK10 BREAK15 BREAK15 BREAK15 BREAK15
ACTUAL CONSUMPTION EXANTE EXANTE EXPOST EXPOST EXANTE EXANTE EXPOST EXPOST   EXANTE EXANTE EXPOST EXPOST
OPTIMAL CONSUMPTION -0.019 -0.374 0.225 0.511 1.072 1.149 0.759 1.623 -0.201 -1.222 0.157 0.295
0.121 0.132 0.081 0.087 0.571 0.603 0.266 0.253 0.169 0.152 0.094 0.115
ENDOWMENT 0.385 0.370 0.366 0.314 0.366 0.389
0.024 0.024 0.040 0.044 0.034 0.027
CASH AVAILABLE 0.005 0.007 -0.008 -0.018 0.058 0.087
0.008 0.008 0.010 0.010 0.016 0.017
Observations 1172 1172 1172 1172 754 754 754 754 418 418 418 418
R-squared 0.41 0.28 0.41 0.29 0.31 0.23 0.31 0.26 0.53 0.41 0.53 0.33
Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1 Standard errors in brackets significant at 10 significant at 5 significant at 1
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Concluding remarks

• If a lump-sum system is implemented, could the
  poverty rates as retired be increased?
• Our results suggest that lump-sum payments could
  not yield increases in the elderly poverty rates.
• Participants under-consume in the earliest
  periods.
• Subjects over-react to the lump-sum payments.
• After R, participants seem to smooth their
  consumption decisions.
• Subjects over-saved.
• Comparing treatments the earlier and the lower
  the lump-sum payment, the higher the saving
  reaction.
• Behavioral explanation consumers seem to spend a
  fixed fraction of their endowment (more than of
  their cash available).