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Intergenerational risksharing and equilibrium asset prices

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  • John Y. Campbell
  • Yves Nosbusch

Abstract

In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.

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File URL: http://eprints.lse.ac.uk/24484/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24484.

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Length: 24 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:ehl:lserod:24484

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References

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  1. Laurence Ball & N. Gregory Mankiw, 2001. "Intergenerational Risk Sharing in the Spirit of Arrow, Debreu, and Rawls, with Applications to Social Security Design," Harvard Institute of Economic Research Working Papers 1921, Harvard - Institute of Economic Research.
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Citations

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Cited by:
  1. Nosbusch, Yves & Campbell, John, 2007. "Intergenerational Risksharing and Equilibrium Asset Prices," Scholarly Articles 3196340, Harvard University Department of Economics.
  2. Glover, Andrew & Heathcote, Jonathan & Krueger, Dirk & Rios-Rull, Jose-Victor, 2014. "Intergenerational Redistribution in the Great Recession," Staff Report 498, Federal Reserve Bank of Minneapolis.
  3. Beetsma, Roel & Bovenberg, A Lans & Romp, Ward E, 2008. "Funded Pensions and Intergenerational and International Risk Sharing in General Equilibrium," CEPR Discussion Papers 7106, C.E.P.R. Discussion Papers.
  4. Guibaud, Stéphane & Nosbusch, Yves & Vayanos, Dimitri, 2013. "Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt," CEPR Discussion Papers 9407, C.E.P.R. Discussion Papers.
  5. Luciano Greco, 2008. "A Note on Social Security and Public Debt," "Marco Fanno" Working Papers 0083, Dipartimento di Scienze Economiche "Marco Fanno".
  6. Carlsson, Evert & Erlandzon, Karl, 2006. "The Bright Side of Shiller-Swaps: A Solution to Inter-generational Risk-sharing," Working Papers in Economics 233, University of Gothenburg, Department of Economics, revised 24 Oct 2006.
  7. Devis Geron, 2009. "Social Security Incidence under Uncertainty Assessing Italian Reforms," CESifo Working Paper Series 2812, CESifo Group Munich.

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