The role of social security in an economy with asymmetric information and 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 information, unless credit rationing emerges with pooling contracts. In this case social security could be welfare reducing even when the safe rate of return falls short of population growth. We provide a full characterization 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 can support these allocations as competitive equilibria. When equilibria are constrained inefficient, optimal contracts are pooling and the optimal stock market value is zero.