Monisankar Bishnu, ISI Delhi

We study two-armed intergenerational transfers - education and pension, in an overlapping generations economy and show that the observed rise and intended fall of pay-as-you-go pensions can be rationalized as the equilibrium choice of the society with imperfect education loan markets. Pensions support the expansion of public education system and are allowed to wither away once efficiency is achieved. This is achieved by exploiting only the market opportunities and without relying on other factors including human capital externalities, general equilibrium effects or socio-political factors highlighted in the literature. The welfare state corrects the market imperfections and eventually improves the welfare to a level strictly above that of complete markets allocation.