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Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?

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Author Info
Antonio Rangel
Richard Zeckhauser

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Abstract

January 14, 1999

Are 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 the 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 be 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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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 99003.

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Date of creation: 14 Jan 1999
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Handle: RePEc:wop:stanec:99003

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  1. Baxter, Marianne, 1989. "Money and market incompleteness in overlapping generations models," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 69-91, July. [Downloadable!] (restricted)
  2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  3. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 37(2), pages 185-202, November. [Downloadable!] (restricted)
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  4. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April. [Downloadable!] (restricted)
  5. Henning Bohn, . "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series 3-98, Department of Economics, UC Santa Barbara. [Downloadable!]
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  6. Smith, Alasdair, 1982. "Intergenerational transfers as social insurance," Journal of Public Economics, Elsevier, vol. 19(1), pages 97-106, October. [Downloadable!] (restricted)
  7. Peled, Dan, 1984. "Stationary pareto optimality of stochastic asset equilibria with overlapping generations," Journal of Economic Theory, Elsevier, vol. 34(2), pages 396-403, December. [Downloadable!] (restricted)
  8. Demange, G. & Laroque, G., 1996. "Social Security and Demographic Shocks," DELTA Working Papers 96-04, DELTA (Ecole normale supérieure).
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  9. Manuelli, Rodolfo, 1990. "Existence and optimality of currency equilibrium in stochastic overlapping generations models: The pure endowment case," Journal of Economic Theory, Elsevier, vol. 51(2), pages 268-294, August. [Downloadable!] (restricted)
  10. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  11. Enders, Walter & Lapan, Harvey E, 1982. "Social Security Taxation and Intergenerational Risk Sharing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 647-58, October. [Downloadable!] (restricted)
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  12. Peled, Dan, 1982. "Informational diversity over time and the optimality of monetary equilibria," Journal of Economic Theory, Elsevier, vol. 28(2), pages 255-274, December. [Downloadable!] (restricted)
  13. Jerry R. Green, 1977. "Mitigating Demographic Risk Through Social Insurance," NBER Working Papers 0215, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Marcello D'Amato & Vincenzo Galasso, 2009. "Political Intergenerational Risk Sharing," CSEF Working Papers 216, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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  2. Florian Heiss & Alexander Ludwig & Joachim Winter, 2002. "Pension reform, capital markets, and the rate of return," MEA discussion paper series 02023, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
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  3. Coleman Bazelon & Kent Smetters, 1999. "Discounting Inside the Washington D.C. Beltway," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 213-228, Fall. [Downloadable!] (restricted)
  4. Debora Kusmerski Bilard, 2008. "Optimal Sharing of Labor Productivity Risks and Mix of Pay-As-You-Go and Savings," Tinbergen Institute Discussion Papers 08-066/1, Tinbergen Institute. [Downloadable!]
  5. Øystein Thøgersen, 2006. "Intergenerational Risk Sharing by Means of Pay-as-you-go Programs – an Investigation of Alternative Mechanisms," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Antonio Rangel, 2000. "Forward and Backward Intergenerational Goods: A Theory of Intergenerational Exchange," NBER Working Papers 7518, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Rowena A. Pecchenino & Patricia S. Pollard, 2003. "Aging, myopia and the pay-as-you-go public pension systems of the G7: a bright future?," Working Papers 2000-015, Federal Reserve Bank of St. Louis. [Downloadable!]
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  8. Rodrigo Cifuentes, 2000. "How Does Pension Reform Affect Savings and Welfare," Working Papers Central Bank of Chile 80, Central Bank of Chile. [Downloadable!]
  9. David Collard, 2000. "Generational transfers and the generational bargain," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(4), pages 453-462.
  10. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2005. "Insurance and Opportunities: The Welfare Implications of Rising Wage Dispersion," CEPR Discussion Papers 5200, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2007. "Insurance and Opportunities: A Welfare Analysis of Labor Market Risk," NBER Working Papers 13673, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Panu Poutvaara, 2001. "On the Political Economy of Social Security and Public Education," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  13. Börsch-Supan, Axel & Ludwig, Alexander & Winter, Joachim, 2001. "Aging, pension reform, and capital flows: A multi-country simulation model," Sonderforschungsbereich 504 Publications 01-08, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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