Savings Externalities in a Second-Best World

The debate among legal scholars about individuals' failure to save enough for retirement happens on a “micro” level. It focuses on the causes and consequences of undersaving from the perspective of individuals and analyzes how legal interventions, such as tax subsidies and nudges, can best address individual saving mistakes. This debate depends on certain assumptions about how the macroeconomy operates. When these assumptions do not hold, neither do the implications of the micro analysis, turning the conventional analysis of undersaving on its head. In fact, in a variety of circumstances, saving imposes a negative externality. Consequently, what looks like undersaving at the individual level may result in oversaving in the aggregate, and private vice may become a public virtue. We adopt a macro perspective and argue for reforms of legal interventions designed to increase savings