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Carla Moreno
''Mandatory savings, informality and liquidity constraints''
( 2020, Vol. 40 No.4 )
Using a national representative survey of households from Peru, this paper characterizes workers' decisions to participate in a pension system, which indicates labor formality. Empirical findings show that a worker's income level has a positive impact on his or her likelihood to participate. To account for these findings, a three-period overlapping generations model with liquid and illiquid assets is implemented. In the model, voluntary participation in the pension system is unattractive to individuals with income under a certain threshold. The retention of illiquid assets, such as pension funds, are not optimal given income constraints. Thus, the liquidity constraint set by a pension system with a mandatory savings policy induces these workers to choose informality.
Keywords: Savings; Liquidity Constraints; Pensions; Informal Labor; Latin America; Retirement;
JEL: E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
H3 - Fiscal Policies and Behavior of Economic Agents: General
Manuscript Received : Mar 03 2020 Manuscript Accepted : Dec 23 2020

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