Optimal Sustainable Intergenerational Insurance

Francesco Lancia, Alessia Russo and Timothy Worrall

No 304, Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: How should successive generations insure each other when the enforcement of transfers between them is limited? This paper examines transfers that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. Consequently, consumption is heteroskedastic and autocorrelated across generations. The optimal intergenerational insurance arrangement is interpreted as a pay-as-you-go social security scheme with means testing and a mixture of flat-rate and contributory-related elements. With logarithmic preferences, the pension received when old depends on the contribution rate paid when young.

Keywords: Intergenerational insurance; Limited commitment; Risk sharing; Stochastic overlapping generations (search for similar items in EconPapers)
JEL-codes: D64 E21 H55 (search for similar items in EconPapers)
Pages: 72
Date: 2021-12, Revised 2021-12
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Downloads: (external link)
http://www.econ.ed.ac.uk/papers/id304_esedps.pdf Revised version, December 2021 (application/pdf)
http://www.econ.ed.ac.uk/papers/id300_esedps.pdf First version, December 2020 (application/pdf)

Related works:
Working Paper: Optimal Sustainable Intergenerational Insurance (2020)
Working Paper: Optimal Sustainable Intergenerational Insurance (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:304

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