This paper examines the annuity aspect of social security within the framework of an overlapping-generations model. The duration of life is assumed to be uncertain. Under a fully funded system, demand for social security is determined by each generation so as to maximize expected lifetime utility, taking into account the welfare of future generations. Under a pay-as-you-go system with intergenerational transfers, demand for retirement benefits by the working population takes into account taxes paid by descendants. It is shown that the two modes of finance are equivalent in terms of all real aggregates. Effects of changes in expected lifetime and [...]

We describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero, where the times spent in each state are of random duration. This class of processes includes Two-State Markov Chains and Renewal Processes as special cases. It is shown that the optimal pricing policy of a monopolistic firm with non-convex costs of price adjustment is ( S, s ) in its real-price, i.e. its nominal price relative to the price level. A basic certainty-equivalence result is proved: i.e. the firm behaves as if it faces a certain and [...]