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Political intergenerational risk sharing

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  • D'Amato, Marcello
  • Galasso, Vincenzo

Abstract

In a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality requires intergenerational risk sharing. We compare the level of intergenerational risk sharing chosen by a benevolent government and by an office-seeking politician. In our political system, the transfer of resources across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. This political system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent, and (iii) less responsive to the realization of the shock than the social optimum. This is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers, and hence overspends.

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  • D'Amato, Marcello & Galasso, Vincenzo, 2010. "Political intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 628-637, October.
  • Handle: RePEc:eee:pubeco:v:94:y:2010:i:9-10:p:628-637
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    4. Ryo Arawatari & Tetsuo Ono, 2011. "A Political Economy Theory of Government Debt and Social Security," Discussion Papers in Economics and Business 11-33, Osaka University, Graduate School of Economics.
    5. Ed Westerhout, 2011. "Intergenerational Risk Sharing in Time-Consistent Funded Pension Schemes," CPB Discussion Paper 176, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Tim Worrall & Alessia Russo & Francesco Lancia, 2017. "Sustainable Intergenerational Insurance," 2017 Meeting Papers 319, Society for Economic Dynamics.
    7. Ishida, Ryo & Oguro, Kazumasa, 2018. "The viability of a voting system that allocates parliamentary seats according to life expectancy: An analysis using OLG models," Japan and the World Economy, Elsevier, vol. 47(C), pages 51-57.
    8. Beetsma, R. & Romp, W., 2016. "Intergenerational Risk Sharing," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 311-380, Elsevier.
    9. Beetsma, Roel & Romp, Ward E & van Maurik, Ron, 2017. "What Drives Pension Reform Measures in the OECD? Evidence based on a New Comprehensive Dataset and Theory," CEPR Discussion Papers 12313, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Pension systems Markov equilibria Social optimum;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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