| Abstract: |
The design of fully funded pension plans is affected by governance and
incentive problems, as underlined by the experience of several countries. The
analytic perspective of contract theory allows to detect the nature of such
problems: pension-fund managers have strong incentives to manipulate market
expectations about their capacity through wasteful activities (e.g.
marketing). The design of funded pension plans has, thus, to trade-off
efficiency losses and gains linked to high-powered incentives associated to
the competition among fund managers. By means of a simple theoretical setting,
this trade-off is shown to be driven by the integration of financing
(contribution collection) and investment (asset allocation and management)
activities. A separation of financing and investment allows to centralize the
former and allocate collected money to a sector of competitive fund managers,
via an auction mechanism. Under contract incompleteness, the quasi-competitive
setting of funded pillar is proven to be Pareto-superior to the market of
competitive pension funds (integrating financing and investment). |