Fairness and Risk-Sharing Across Generations
University of Washington - Department of Finance and Business Economics
Christopher M. Hrdlicka
University of Washington - Michael G. Foster School of Business
May 3, 2013
The preference for fairness moderates the trade-offs leaders of institutions and society make when dividing a stochastic surplus across generations. We show that an increasing preference for intergenerational fairness reduces risk-taking, implying a more stable growth path for the surplus and a lower share of the surplus allocated to the current generation. These results contrast to those of standard deterministic fairness models which imply that the optimal strategy is to maximize risk taking and allocate to the current generation a share of the surplus equal to the expected return from this risk taking. We apply our framework to three examples: endowed funds (sovereign, non-profit, university), public pensions plans and the depletion of natural resources. We reveal a conflict in public policy between mandates for intergenerational fairness and mandates for high payments to current generations.
Number of Pages in PDF File: 48
Keywords: Fairness, intergenerational equity, risk-sharing, portfolio choice, endowments, public pension plans, global warming
JEL Classification: D63, D90, G11, G23, Q28working papers series
Date posted: June 2, 2012 ; Last revised: May 5, 2013
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