Tax and transfer programs are analyzed in the context of a model with idiosyncratic productivity shocks and incomplete markets. The effects are contrasted with those obtained in a stand-in household model featuring no idiosyncratic shocks and complete markets. The main finding is that the impact on hours remains very large, but the welfare consequences are very different. The analysis also suggests that tax and transfer policies have large effects on average labor productivity via selection effects on employment.

Employment to population ratios differ markedly across OECD countries, especially for people over 55. Social security features also differ markedly across the OECD, particularly with respect to replacement rates, entitlement ages and earnings tests. I conjecture that differences in social security features explain many differences in employment to population ratios at older ages. I assess my conjecture quantitatively with a life cycle general equilibrium model of retirement. At ages 60-64 the correlation between my model's simulations and observed data is .67. Replacement rates and the earnings tests are key features.

How is the size of the informal sector affected when the distribution of social expenditures across formal and informal workers changes? How is it affected when the tax rate changes along with the generosity of these transfers? In our search model, taxes are levied on formal-sector workers as a proportion of their wage. Transfers, in contrast, are lump-sum and are received by both formal and informal workers. This implies that high-wage formal workers subsidize low-wage formal workers as well as informal workers. We calibrate the model to Mexico and perform counterfactuals. We find that the size of the informal sector is quite inelastic to changes in taxes and transfers. This is due to the presence of search frictions and to the cross-subsidy in our model: for low-wage formal jobs, a tax increase is roughly offset by an increase in benefits, leaving the unemployed approximately indifferent. Our results are consistent with the empirical evidence on the recent introduction of the "Seguro Popular" healthcare program.JEL Codes: E26, J46, O17

work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose, as provided below. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Following a peer review process, and with previous written consent by the Inter-American Development Bank (IDB), a revised version of this work may also be reproduced in any academic journal, including those indexed by the American Economic Association's EconLit, provided that the IDB is credited and that the author(s) receive no income from the publication. Therefore, the restriction to receive income from such publication shall only extend to the publication's author(s). With regard to such restriction, in case of any inconsistency between the Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives license and these statements, the latter shall prevail.Note that link provided above includes additional terms and conditions of the license.The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.http://www.iadb.org 2016 1 Abstract * This paper examines the effects of non-contributory pension programs at the federal and state levels on Mexican households' saving patterns using micro data from the Mexican Income and Expenditure Survey. The federal program by itself appears to reduce the saving rate of households whose oldest member is either 18 to 54 or 65 to 69. State programs by themselves have no significant effects on household saving rates in the smallest localities, but in larger localities they may reduce the saving of households with members in their sixties. The combination of both types of programs generally does not have statistically significant effects on households' aggregate saving, probably because each program seems to affect different population strata. No significant effects are found for households whose oldest member is age-eligible (70 and older). Within specific investment categories, evidence is found of increases in human capital and in durable and financial goods for some age groups. Finally, the paper provides evidence on household-level labor supply responses.JEL classifications: D14, J26, O12, H55

We calibrate the cost of sovereign defaults using a continuous time model, where government default decisions may trigger a change in the regime of a stochastic TFP process. We calibrate the model to a sample of European countries from 2009 to 2012. By comparing the estimated drift in default relative to that in no-default, we find that TFP falls in the range of 3.70-5.88%. The model is consistent with observed falls in GDP growth rates and subsequent recoveries and illustrates why fiscal multipliers are small during sovereign debt crises.