Optimal risk sharing and incentive provision in social security systems*

Carlos Eugênio da Costa and Rafael Berriel

No 851, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Should workers or retirees bear the risk of economic growth? We show that efficient risk-sharing depends on how incentive provision – through consumption dispersion – affects the marginal value of resources, and how retirement promises back-load incentive provision. We use statistics for these two forces to show that perfect risk-sharing is optimal when the utility from consumption is logarithmic or when aggregate productivity growth is i.i.d. When neither condition holds, deviations from perfect risk sharing increase welfare. These deviations are, however, small due to the failure of a consumption-based stochastic discount factor (SDF) to price consumption growth. An augmented model that matches asset price behavior yields quantitatively relevant deviations from perfect risk-sharing.

Date: 2026-03-24
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:851

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