Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?
AbstractAre market and voting institutions capable of producing optimal intergenerational risk-sharing? To study this question, we consider a simple endowment economy with uncertainty and overlapping generations. Endowments are stochastic; thus it is possible to increase the welfare of every generation using intergenerational transfers that might depend on the state of the world. We characterize the transfers that are necessary to restore efficiency and compare them to the transfers that take place in markets and voting institutions. Unlike most of that literature, we study both ex-ante and interim risk-sharing. Our main conclusion is that both types of institutions have serious problems. Markets cannot generate ex-ante risk-sharing because agents can trade only after they are born. Furthermore, markets generate interim efficient insurance in some but not all economies because they cannot generate forward (old to young) intergenerational transfers. This market failure, in theory, could be corrected by government intervention. However, as long as government policy is determined by voting, intergenerational transfers might by driven more by redistributive politics than by risk sharing considerations. Successful government intervention can arise, even though agents can only vote after they are born, but only if the young determine policy in every election.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6949.
Date of creation: Feb 1999
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Publication status: published as Antonio Rangel, Richard Zeckhauser. "Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?," in John Y. Campbell and Martin Feldstein, editors, "Risk Aspects of Investment-Based Social Security Reform" University of Chicago Press (2001)
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Other versions of this item:
- Antonio Rangel & Richard Zeckhauser, 2001. "Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 113-152 National Bureau of Economic Research, Inc.
- Antonio Rangel & Richard Zeckhauser, 1999. "Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?," Working Papers 99003, Stanford University, Department of Economics.
- NEP-ALL-1999-02-15 (All new papers)
- NEP-CDM-1999-02-15 (Collective Decision-Making)
- NEP-IAS-1999-02-15 (Insurance Economics)
- NEP-MIC-1999-02-15 (Microeconomics)
- NEP-PBE-1999-02-15 (Public Economics)
- NEP-PUB-1999-02-15 (Public Finance)
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