Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?

Antonio Rangel and Richard Zeckhauser

in Risk Aspects of Investment-Based Social Security Reform

Published by University of Chicago Press

Published in print December 2000 | ISBN: 9780226092553
Published online February 2013 | e-ISBN: 9780226092560 | DOI:
Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?

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Using an overlapping-generations model with randomness in both total endowments and the distribution of endowments between generations, this chapter examines whether markets or governments can generate efficient intergenerational risk sharing. The model makes the standard simplifying assumption that each generation lives only two periods and that only two generations are therefore alive at any one time. In this setting, a long-lived asset can facilitate intergenerational risk sharing by inducing young generations to pay old generations for their claims to the asset. Both markets and governments have the potential to promote risk sharing, markets through the trade of financial instruments, governments through social insurance programs. Each has potential on the intergenerational front since there are financial instruments that last for many generations and some social insurance programs, such as social security or subsidized education, transfer resources across generations. This chapter argues that voluntary contributions are unlikely to work in practice and that efficient government intergenerational transfers may be incompatible with a democratic political system since future generations cannot vote to express their interests.

Keywords: endowments; markets; governments; risk sharing; intergenerational transfers; investments; social security; voluntary contributions

Chapter.  14855 words.  Illustrated.

Subjects: Economic Systems

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