Risk Management of Pension Systems from the Perspective of Loss Aversion
This paper studies pension design from a risk management point of view using a lexicographic loss aversion model. Interest in this model stems from the fact that it explains income expansion paths of equity and total savings particularly well. I find that all income groups are likely to benefit from a PAYGO system, even in the absence of any redistribution. Optimal equity investments are close to zero for the two bottom income quintiles and increase sharply for higher incomes. The results are compared to optimal pension plans under HARA preferences. I find that a PAYGO system has higher value under loss aversion than in the HARA case. Moreover, equity shares correspond more closely to empirical observations.
|Date of creation:||2005|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Luigi Guiso & Tullio Jappelli, 2002. "Stockholding in Italy," CSEF Working Papers 82, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Marianne Baxter & Robert G. King, 2001. "The Role of International Investment in a Privatized Social Security System," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 371-438 National Bureau of Economic Research, Inc.
- Francisco J. Gomes & Alexander Michaelides, 2003.
"Portfolio choice with internal habit formation : a life-cycle model with uninsurable labor income risk,"
LSE Research Online Documents on Economics
196, London School of Economics and Political Science, LSE Library.
- Francisco Gomes & Alexander Michaelides, 2003. "Portfolio Choice With Internal Habit Formation: A Life-Cycle Model With Uninsurable Labor Income Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 729-766, October.
- Gomes, Francisco J & Michaelides, Alexander, 2003. "Portfolio Choice with Internal Habit Formation: A Life-Cycle Model with Uninsurable Labour Income Risk," CEPR Discussion Papers 3868, C.E.P.R. Discussion Papers.
- John Y. Campbell & Joao F. Cocco & Francisco J. Gomes & Pascala J. Maenhout, 2000.
"Investing Retirement Wealth? A Life-Cycle Model,"
Harvard Institute of Economic Research Working Papers
1896, Harvard - Institute of Economic Research.
- Michael Haliassos, 2002. "Stockholding: Recent Lessons from Theory and Computations," University of Cyprus Working Papers in Economics 0206, University of Cyprus Department of Economics.
- Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
- James M. Poterba & Joshua Rauh & Steven F. Venti, 2005.
"Utility Evaluation of Risk in Retirement Saving Accounts,"
in: Analyses in the Economics of Aging, pages 13-58
National Bureau of Economic Research, Inc.
- James Poterba & Joshua Rauh & Steven Venti & David Wise, 2003. "Utility Evaluation of Risk in Retirement Saving Accounts," NBER Working Papers 9892, National Bureau of Economic Research, Inc.
- Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2000.
"Do the Rich Save More?,"
NBER Working Papers
7906, National Bureau of Economic Research, Inc.
- Martin Feldstein & Jeffrey B. Liebman, 2001.
NBER Working Papers
8451, National Bureau of Economic Research, Inc.
- Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, September.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_1572. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.