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Aggregate risk sharing and equivalent financial mechanisms in an endowment economy of incomplete participation

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  • Pamela Labadie

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Abstract

A pure endowment overlapping generations economy can be inefficient because of insufficient risk sharing. The introduction of an outside asset by a government or the existence of a clearing house can remedy the inefficiency by allowing some intergenerational risk sharing. While the typical outside asset is fiat money, many alternative financial mechanisms, such as social security, risk-free government bonds, “mispriced” deposit insurance, and income insurance can serve the same function as fiat money. Hence there are many equivalent financial mechanisms that provide intergenerational insurance. In the presence of uncertainty, there are several concepts of Pareto optimality that can be appropriately applied in an overlapping generations setting. I examine the risk-sharing arrangements associated with two different concepts of optimality, including how these arrangements are financed. The results are related to, and in some instances an extension of, the equivalence results obtained by Chamley and Polemarcharkis (1984), Weiss (1977), and Wallace (1981). Copyright Springer-Verlag Berlin/Heidelberg 2004

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File URL: http://hdl.handle.net/10.1007/s00199-004-0477-5
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 24 (2004)
Issue (Month): 4 (November)
Pages: 789-809

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Handle: RePEc:spr:joecth:v:24:y:2004:i:4:p:789-809

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Related research

Keywords: Dynamic inefficiency; Aggregate risk sharing; Overlapping generations.;

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Cited by:
  1. Eisei Ohtaki & Hiroyuki Ozaki, 2013. "Monetary Equilibria and Knightian Uncertainty," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-032, Keio/Kyoto Joint Global COE Program.
  2. Ohtaki, Eisei, 2014. "Tractable graphical device for analyzing stationary stochastic OLG economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 16-26.
  3. Kanas, Angelos, 2014. "Bond futures, inflation-indexed bonds, and inflation risk premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 82-99.

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