Old age consumption and pension policy in a two-tier developing economy

In a number of developing countries, an important part of the economy is informal both in terms of production and of social protection. In this paper we consider introducing a universal pension system in the formal sector. It is shown to have two main effects: first, it makes the formal sector more attractive to migration and second, it affects capital accumulation in a way which depends on the type of social security introduced, PAYG or funded, and its induced effect on private saving.