Political Intergenerational Risk Sharing

Marcello D'Amato and Vincenzo Galasso

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: TIn 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 benevolent government and by an office-seeking politician. In our political system, the transfer of resources across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. This political system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent, and (iii) less responsive to the realization of the shock than the (time consistent) social optimum. This is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers, and hence overspends. Aging increases the optimal transfer, but surprisingly makes office-seeking politicians more conservative, by increasing the cost for future politicians to compensate the current young.

Keywords: Pension Systems; Markov equilibria; social optimum (search for similar items in EconPapers)
JEL-codes: D72 H55 (search for similar items in EconPapers)
Date: 2009-03-06
New Economics Papers: this item is included in nep-dge and nep-pol
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Published in Journal of Public Economics, 2010, 94(9-10), 628-637

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Related works:
Journal Article: Political intergenerational risk sharing (2010)
Working Paper: Political Intergenerational Risk Sharing (2008)
Working Paper: Political Intergenerational Risk Sharing (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:216

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