Public Choice

, Volume 140, Issue 1–2, pp 161–184 | Cite as

The impact of surplus sharing on the portfolio mix of public sector defined benefit pension plans: a public choice approach

  • J. Richard Aronson
  • James A. Dearden
  • Vincent G. Munley


The riskiness of state employee pension plan portfolios varies across states. We investigate whether this variation is related to how public employees and taxpayers share actuarial surpluses of pension accounts. We focus on two determinants of a plan’s asset mix: the relative influence of public employees to taxpayers; and whether a surplus-sharing contract is specified. Our theoretical model demonstrates that the effect of public employee influence on the asset mix is ambiguous. Our empirical results corroborate this complex theoretical result. In our theoretical and empirical analyses, if a surplus sharing rule is specified, plans adopt a more aggressive investment allocation.


Pensions Contracts 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bolton, P., & Dewatripont, M. (2005). Contract theory. Cambridge: MIT. Google Scholar
  2. Che, Y.-K., & Hausch, D. (1999). Cooperative investments and the value of contract. American Economic Review, 89, 125–147. Google Scholar
  3. Coronado, J., Engen, E., & Knight, B. (2003). Public funds and private capital markets: the investment practices and performance of state and local pension funds. National Tax Journal, 56, 579–594. Google Scholar
  4. Eaton, T., & Nofsinger, J. (2004). The effect of financial constraints and political pressure on the management of public pension plans. The Journal of Accounting and Public Policy, 23, 161–189. CrossRefGoogle Scholar
  5. Fuest, C. (2000). The political economy of tax coordination as a bargaining game between bureaucrats and politicians. Public Choice, 103, 357–382. CrossRefGoogle Scholar
  6. Gordon, M., Michell, O., & Twinney, M. (1997). Positioning pensions for the twenty-first century, pension research council. Philadelphia: University of Pennsylvania Press. Google Scholar
  7. Greene, W. (2003). Econometric analysis. Upper Saddle River: Prentice Hall. Google Scholar
  8. Hart, O., & Moore, J. (1999). Foundations of incomplete contracts. Review of Economic Studies, 66, 115–138. CrossRefGoogle Scholar
  9. Holmström, B. (1979). Moral hazard and observability. Bell Journal of Economics, 10, 74–91. CrossRefGoogle Scholar
  10. Mitchell, O., & Hsin, P.-L. (1994). Public pension governance and performance. NBER Working Paper 4632. Google Scholar
  11. Mueller, D. (1989). Public choice II. Cambridge: Cambridge University Press. Google Scholar
  12. Munnell, A. H., & Sunden, A. (2002). Investment practices of state and local pension funds. In O. Mitchell & E. Hustead (Eds.), Pensions in the public sector (pp. 153–194). Philadelphia: University of Pennsylvania Press. Google Scholar
  13. Rajnes, D. (2001). State and local retirement plans: innovation and renovation. Washington: Employee Benefits Research Institute. Google Scholar
  14. Romano, R. (1993). Public pension fund activism in corporate governance reconsidered. Columbia Law Review, 93, 795–853. CrossRefGoogle Scholar
  15. Schneider, M., & Damonpour, F. (2002). Public choice economics and public pension plan funding. Administration and Society, 34, 57–86. CrossRefGoogle Scholar
  16. Schneider, M. (2005). The status of U.S. public pension plans. Review of Public Personnel Administration, 25, 107–137. CrossRefGoogle Scholar
  17. Useem, M., & Mitchell, O. (2000). Holders of the purse strings: governance and performance of the public retirement systems. Social Science Quarterly, 81, 489–506. Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • J. Richard Aronson
    • 1
  • James A. Dearden
    • 1
  • Vincent G. Munley
    • 1
  1. 1.Lehigh UniversityBethlehemUSA

Personalised recommendations