Risk Sharing in a Stochastic Overlapping Generations Economy
This paper examines the impact of government policy on the allocation of aggregate risks in a stochastic OG model with production. The market allocation of risk depends significantly on the young generationâ€™s willingness to substitute intertemporally and on government policy. Safe government debt shifts productivity risk from old to young while wage-indexed social security is essentially neutral. I also compare the market allocation to the efficient allocation of risk. The market allocation is generally inefficient, except for the special case of wage-proportional incomes and logarithmic utility. Safe government debt seems to shift risk in the wrong direction.
|Date of creation:||01 Jan 1998|
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