Intergenerational risksharing and equilibrium asset prices

John Campbell and Yves Nosbusch

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.

JEL-codes: G12 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007-02-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://eprints.lse.ac.uk/24484/ Open access version. (application/pdf)

Related works:
Journal Article: Intergenerational risksharing and equilibrium asset prices (2007)
Working Paper: Intergenerational Risksharing and Equilibrium Asset Prices (2007)
Working Paper: Intergenerational Risksharing and Equilibrium Asset Prices (2007)
Working Paper: Intergenerational Risksharing and Equilibrium Asset Prices (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24484

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().