Social security in an analytically tractable overlapping generations model with aggregate and idiosyncratic risk

Daniel Harenberg and Alexander Ludwig

No 71, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations. We derive the equilibrium dynamics in closed form and show that joint presence of both risks leads to over-proportional risk exposure for households. This implies that the whole benefit from insurance through social security is greater than the sum of the benefits from insurance against each of the two risks in isolation. We measure this through interaction effects which appear even though the two risks are orthogonal by construction. While the interactions unambiguously increase the welfare benefits from insurance, they can in- or decrease the welfare costs from crowding out of capital formation. The net effect depends on the relative strengths of the opposing forces.

Keywords: social security; idiosyncratic risk; aggregate risk; welfare; insurance; crowding out (search for similar items in EconPapers)
JEL-codes: C68 E27 E62 G12 H55 (search for similar items in EconPapers)
Date: 2015, Revised 2015
New Economics Papers: this item is included in nep-age, nep-dge, nep-fdg, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Social security in an analytically tractable overlapping generations model with aggregate and idiosyncratic risks (2015)
Working Paper: Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk (2014)
Working Paper: Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:71

DOI: 10.2139/ssrn.2515696

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