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Intergenerational Risksharing and Equilibrium Asset Prices

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  • Nosbusch, Yves
  • Campbell, John

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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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3196340.

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Date of creation: 2007
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Publication status: Published in Journal of Monetary Economics
Handle: RePEc:hrv:faseco:3196340

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  1. Krueger, Dirk & Kubler, Felix, 2005. "Pareto improving social security reform when financial markets are incomplete!?," CFS Working Paper Series, Center for Financial Studies (CFS) 2005/12, Center for Financial Studies (CFS).
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Cited by:
  1. Beetsma, Roel M.W.J. & Bovenberg, A. Lans & Romp, Ward E., 2011. "Funded pensions and intergenerational and international risk sharing in general equilibrium," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(7), pages 1516-1534.
  2. Stephane Guibaud & Yves NOsbusch & Dimitri Vayanos, 2011. "Bond Market Clienteles, the Yield Curve and the Optimal Maturity Structure of Government Debt," FMG Discussion Papers, Financial Markets Group dp669, Financial Markets Group.
  3. Luciano Greco, 2008. "A Note on Social Security and Public Debt," "Marco Fanno" Working Papers, Dipartimento di Scienze Economiche "Marco Fanno" 0083, Dipartimento di Scienze Economiche "Marco Fanno".
  4. Andrew Glover & Jonathan Heathcote & Dirk Krueger & José-Víctor Ríos-Rull, 2011. "Intergenerational redistribution in the Great Recession," Working Papers, Federal Reserve Bank of Minneapolis 684, Federal Reserve Bank of Minneapolis.
  5. Nosbusch, Yves & Campbell, John, 2007. "Intergenerational Risksharing and Equilibrium Asset Prices," Scholarly Articles, Harvard University Department of Economics 3196340, Harvard University Department of Economics.
  6. Devis Geron, 2009. "Social Security Incidence under Uncertainty Assessing Italian Reforms," CESifo Working Paper Series, CESifo Group Munich 2812, CESifo Group Munich.
  7. Carlsson, Evert & Erlandzon, Karl, 2006. "The Bright Side of Shiller-Swaps: A Solution to Inter-generational Risk-sharing," Working Papers in Economics, University of Gothenburg, Department of Economics 233, University of Gothenburg, Department of Economics, revised 24 Oct 2006.

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