 Intergenerational Risk Sharing: Myth or PossibilityDirk Krueger and Felix Kubler
No 188, Computing in Economics and Finance 2001 from Society for Computational Economics Abstract: In this paper we develop an algorithm to numerically solve dynamic stochastic overlapping generations economies. In our model agents live for six periods and face idiosyncratic as well as aggregate uncertainty with respect to their labor and capital income. Insurance markets are absent and individuals can only self-insure by risk-free borrowing and lending. Our algorithm is based on Chebychev collocation methods and allows us to compute recursive competitive equilibria in an economy where the state space includes the distribution of assets across ages, in addition to the exogenous discrete Markov chain describing aggregate and idiosyncratic uncertainty. We employ our numerical techniques to study the intergenerational risk sharing properties of a pay-as-you go social security system and the welfare effects of a hypothetical reform towards a fully funded system. Although an unfunded social security system provides partial intergenerational insurance against aggregate and intragenerational insurance against idiosyncratic uncertainty, the detrimental effects for aggregate capital accumulation more than outweigh the insurance aspect of an unfounded system. The ergodic distribution of ex ante utilities with an unfounded system is stochastically dominated by the corresponding distribution with a fully funded system for a large range of the structural parameters of the model. More surprisingly, sequentially completing the markets, i.e. providing perfect risk sharing against idiosyncratic uncertainty can lead to substantial welfare losses for future generations. This is due to the fact that precautionary saving in the absence of complete markets leads to higher capital accumulation and hence higher equilibrium wages for future generations. Keywords: Intergenerational Risk Sharing; Social Security; Overlapping Generations Models (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf1:188 Access Statistics for this paper More papers in Computing in Economics and Finance 2001 from Society for Computational Economics Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.