 Intergenerational risk sharing under loss averse preferencesMark-Jan Boes and Arjen Siegmann Journal of Banking & Finance, 2018, vol. 92, issue C, 269-279 Abstract: Individual retirement savings schemes could benefit from risk-sharing mechanisms between generations that take behavioral aspects into account. We introduce a novel risk-sharing mechanism that incorporates nominal loss-aversion in two ways. First, the system avoids out-of-pocket wealth transfers by sharing only a fraction of positive returns over a high-water mark of pension assets. Secondly, payments from a generation insurance fund are targeted at nominal pension shortfalls below a reference point, which mitigates the loss experience at retirement. From a simulation of overlapping generations with stochastic asset returns and interest rates we find that the generation insurance scheme outperforms a pure individual retirement scheme by a significant margin: a similar risk of pension shortfall can be achieved with a contribution rate that is up to 20% lower. The efficiency gains vary with the extent of risk sharing over generations but remain large for sensible parameter values. Keywords: Retirement saving; Loss aversion; Risk sharing; Insurance; Collective defined-contribution (CDC) (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:92:y:2018:i:c:p:269-279 DOI: 10.1016/j.jbankfin.2016.08.001 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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