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Optimal Sustainable Intergenerational Insurance

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  • Francesco Lancia
  • Alessia Russo
  • Tim Worrall

Abstract

Optimal intergenerational insurance is examined in a stochastic overlapping generations endowment economy with limited enforcement of risk-sharing transfers. Transfers are chosen by a benevolent planner who maximizes the expected discounted utility of all generations while respecting the participation constraint of each generation. We show that the optimal sustainable intergenerational insurance is history dependent. The risk from a shock is unevenly spread into the future, generating heteroscedasticity and autocorrelation of consumption even in the long run. The optimum can be interpreted as a social security scheme characterized by a minimum welfare entitlement for the old and state-contingent entitlement thresholds.

Suggested Citation

  • Francesco Lancia & Alessia Russo & Tim Worrall, 2020. "Optimal Sustainable Intergenerational Insurance," Edinburgh School of Economics Discussion Paper Series 300, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:300
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    Cited by:

    1. Daniel Dimitrov, 2022. "Intergenerational Risk Sharing with Market Liquidity Risk," Tinbergen Institute Discussion Papers 22-028/VI, Tinbergen Institute.

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    More about this item

    Keywords

    Intergenerational insurance; Limited commitment; Risk sharing; Stochastic overlapping generations;
    All these keywords.

    JEL classification:

    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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