THE ROLE OF SOCIAL-SECURITY IN AN ECONOMY WITH ASYMMETRIC INFORMATIONAND FINANCIAL-INTERMEDIARIES

We study an overlapping generations model with production, asymmetric information and competitive financial intermediaries. Social security may be beneficial even when it should not be used under full informati on, unless credit rationing emerges with pooling contracts. In this ca se social security could be welfare reducing even when the safe rate o f return falls short of population growth. We provide a full character ization of 'constrained Pareto efficient' allocations and prove that, when the expected marginal product exceeds population growth and high- risk firms have a low probability of default, no tax-transfer policy c an support these allocations as competitive equilibria. When equilibri a are constrained inefficient, optimal contracts are pooling and the o ptimal stock market value is zero.