Political Intergenerational Risk Sharing

Vincenzo Galasso and Marcello D'Amato

No 6972, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 time-consistent intergenerational risk sharing chosen by a social planner and by office seeking politicians. In the political setting, the transfer of resources across generations ? a PAYG pension system ? is determined as a Markov equilibrium of a probabilistic voting game. Negative shocks represented by low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. Unless the young are crucial to win the election, this political system generates more intergenerational risk sharing than the (time consistent) social optimum. In particular, these transfers are more persistent and less responsive to the realization of the shock than optimal. This is because politicians anticipate their current transfers to the elderly to be compensated through offsetting transfers by future politicians, and thus have an incentive to overspend. Perhaps surprisingly, aging increases the socially optimal transfer but makes politicians less likely to overspend, by making it more costly for future politicians to compensate the current young.

Keywords: Markov equilibria; Pension systems; Social optimum (search for similar items in EconPapers)
JEL-codes: D72 H55 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-cdm, nep-dge and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP6972 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Political intergenerational risk sharing (2010)
Working Paper: Political Intergenerational Risk Sharing (2009)
Working Paper: Political Intergenerational Risk Sharing (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6972

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6972

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().