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Risk Sharing in a Stochastic Overlapping Generations Economy

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  • Bohn, Henning

Abstract

This paper examines the impact of government policy on the allocation of aggregate risks in a stochastic OG model with production. The market allocation of risk depends significantly on the young generation’s willingness to substitute intertemporally and on government policy. Safe government debt shifts productivity risk from old to young while wage-indexed social security is essentially neutral. I also compare the market allocation to the efficient allocation of risk. The market allocation is generally inefficient, except for the special case of wage-proportional incomes and logarithmic utility. Safe government debt seems to shift risk in the wrong direction.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt9r2809f0.

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Date of creation: 01 Jan 1998
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Handle: RePEc:cdl:ucsbec:qt9r2809f0

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Keywords: Risk; Sharing; Stochastic; Overlapping; Generations; Economy;

References

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  1. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(3), pages 469-494, December.
  2. Greenwood, Jeremy & Hercowitz, Zvi, 1991. "The Allocation of Capital and Time over the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(6), pages 1188-214, December.
  3. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Staff Report, Federal Reserve Bank of Minneapolis 147, Federal Reserve Bank of Minneapolis.
  4. Henning Bohn, 1997. "Social Security reform and financial markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, vol. 41(Jun), pages 193-227.
  5. Bohn, Henning, 1994. "Optimal state-contingent capital taxation: when is there an indeterminacy?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(1), pages 125-137, August.
  6. Martin Feldstein, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," NBER Working Papers 5413, National Bureau of Economic Research, Inc.
  7. Enders, Walter & Lapan, Harvey E., 1982. "Social Security Taxation and Inter-Generational Risk Sharing," Staff General Research Papers, Iowa State University, Department of Economics 10822, Iowa State University, Department of Economics.
  8. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, Elsevier, vol. 37(2), pages 185-202, November.
  9. Smith, Alasdair, 1982. "Intergenerational transfers as social insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 19(1), pages 97-106, October.
  10. Baxter, Marianne & Jermann, Urban J, 1997. "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 170-80, March.
  11. Peled, Dan, 1982. "Informational diversity over time and the optimality of monetary equilibria," Journal of Economic Theory, Elsevier, Elsevier, vol. 28(2), pages 255-274, December.
  12. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  13. Rios-Rull, Jose-Victor, 1996. "Life-Cycle Economies and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(3), pages 465-89, July.
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