Social security and equity investment in an economy with financial intermediaries and costly monitoring

This paper aims at extending the analysis of the efficiency of equilibria in an OLG framework with asymmetric information. I study the stationary states of an economy where consumers, firms and financial intermediaries are at work. The economy is affected by ex post moral hazard due to costly state verification; because of this inefficiency in the private financial system, a result different from the Samuelson-Diamond conclusions about the Pareto ranking of different equilibria is derived: the introduction of social security is proved to be Pareto improving in a market economy even in cases in which the economy is dynamically efficient. Moreover, I show that market outcomes can fail to achieve the Constrained Pareto Optimal allocation.