Constraints on Big-Bang Solutions: The Case of Intergenerational Transfers

This paper introduces intergenerational equity into the analysis of transitions to a market economy. Analyzing Social Security privatization, we find that payroll tax labor market distortions, rather than capital tax capital market distortions, are the major source of any efficiency gain from a privatization. Further, the transition path following privatization determines the distribution of efficiency gains across generations. Finally, measuring the ease of privatization as the length of the shortest politically feasible transition, some conventional beliefs concerning factors that constitute favorable or unfavorable conditions for Social Security privatization are generally unsupported.