Investment policies and risk sharing by corporate pensions

C. Wei Li, Tong Yao and Jie Ying

Journal of Economic Dynamics and Control, 2024, vol. 165, issue C

Abstract: Using a corporate risk management model, we show that the investment risk sharing features of defined benefit corporate pensions help explain their aggressive investment policies as well as their diminishing popularity over time. For reasonable parameter values, the model successfully captures key empirical patterns including pension asset allocation and the relations among pension investment risk, corporate bankruptcy probability, and pension funding. Consistent with the observed trend, we find that switching from defined-benefit plans to defined-contribution plans enhances risk transfer and reduces firms' pension funding costs.

Keywords: Defined benefit pensions; Pension investment (search for similar items in EconPapers)
JEL-codes: G11 G23 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:165:y:2024:i:c:s0165188924000836

DOI: 10.1016/j.jedc.2024.104891

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