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Intergenerational Risk Sharing and Fiscal Policy

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  • Henning Bohn

Abstract

The paper derives conditions for ex ante efficient intergenerational risk sharing in overlapping generations models. I show how the efficiency of a fiscal policy can be evaluated without distributional judgments, I derive efficiency conditions, and then examine specific models. For models with CRRA preferences, laissez-faire allocations are found inefficient in the direction of imposing not enough productivity risk on retirees and too much risk on future generations. Governments commonly issue safe debt and promise safe public pensions, which protects retirees and shifts more risk onto future generations. This is inefficient, except under one condition: if preferences display age-increasing risk aversion. Thus governments seem to treat future generations of workers as if they are more risk tolerant than retirees

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 22.

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Date of creation: 2004
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Handle: RePEc:red:sed004:22

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Keywords: Fiscal Policy Risk Sharing;

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  15. Auerbach, Alan J. & Hassett, Kevin, 2007. "Optimal long-run fiscal policy: Constraints, preferences and the resolution of uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1451-1472, May.
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