Advanced Search
MyIDEAS: Login to save this paper or follow this series

Pension plan funding, risk sharing and technology choice

Contents:

Author Info

  • David C. Webb
Registered author(s):

    Abstract

    This paper presents a general equilibrium analysis on the interactions between pension plan funding, capital structure, technology choice and the equity premium. The paper shows that economies with large funded defined pension schemes may be biased towards safe production. The pricipal results derive from the existence of borrowing and short sales constraints. In the first scenario workers are constrained in the capital market and debt is risk-free. If pension benefits are sufficiently high, then the capital market constraint may be binding. Then, leveraging the risky technology gives workers an adjustment channel through which they may undo an over-exposure to risk-free investment. This results in more risky production and a fall in the equity premium. In the second scenario workers are constrained in the capital market and debt is subject to default risk. If the level of the resulting pension plan shortfall risk is low and if pension benefits are sufficiently high, then the previous is at work. If the level of shortfall risk is high, workers hedge themselves by holding risk-free assets and the constraint in the capital market is no longer binding. Then the risky firm does not benefit from leveraging and there is more safe production in the economy.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://eprints.lse.ac.uk/24641/
    File Function: Open access version.
    Download Restriction: no

    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 24641.

    as in new window
    Length: 37 pages
    Date of creation: 28 Nov 2007
    Date of revision:
    Handle: RePEc:ehl:lserod:24641

    Contact details of provider:
    Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
    Phone: +44 (020) 7405 7686
    Web page: http://www.lse.ac.uk/
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Andrew B. Abel, 2001. "The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks," American Economic Review, American Economic Association, vol. 91(1), pages 128-148, March.
    2. Saku Aura & Peter Diamond Author-X-Name-Peter & John Geanakoplos, . "Savings and Portfolio Choice in a Two-Period Two-Asset Model," Cowles Foundation Discussion Papers 1268, Cowles Foundation for Research in Economics, Yale University.
    3. Constantinides, G.M. & Donalson, J.B. & Mehra, R., 1997. "Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle," Papers 97-24, Columbia - Graduate School of Business.
    4. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    5. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-55, September.
    6. Ippolito, Richard A, 1985. "The Economic Function of Underfunded Pension Plans," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 611-51, October.
    7. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "Stockholder Unanimity in Making Production and Financial Decisions," The Quarterly Journal of Economics, MIT Press, vol. 94(3), pages 543-66, May.
    8. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-70, March.
    9. Hemming, Richard & Harvey, Russell, 1983. "Occupational Pension Scheme Membership and Retirement Saving," Economic Journal, Royal Economic Society, vol. 93(369), pages 128-44, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:24641. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lucy Ayre).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.