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Political intergenerational risk sharing

Marcello D'Amato () and Vincenzo Galasso ()

Journal of Public Economics, 2010, vol. 94, issue 9-10, 628-637

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 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 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.

Keywords: Pension; systems; Markov; equilibria; Social; optimum (search for similar items in EconPapers)
Date: 2010
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Working Paper: Political Intergenerational Risk Sharing (2009) Downloads
Working Paper: Political Intergenerational Risk Sharing (2008) Downloads
Working Paper: Political Intergenerational Risk Sharing (2008) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:94:y:2010:i:9-10:p:628-637

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