Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?

33 Pages Posted: 12 Jul 2000 Last revised: 29 Dec 2022

See all articles by Antonio Rangel

Antonio Rangel

California Institute of Technology

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1999

Abstract

Are market and voting institutions capable of producing optimal intergenerational risk-sharing? To study this question, we consider a simple endowment economy with uncertainty and overlapping generations. Endowments are stochastic; thus it is possible to increase the welfare of every generation using intergenerational transfers that might depend on the state of the world. We characterize the transfers that are necessary to restore efficiency and compare them to the transfers that take place in markets and voting institutions. Unlike most of that literature, we study both ex-ante and interim risk-sharing. Our main conclusion is that both types of institutions have serious problems. Markets cannot generate ex-ante risk-sharing because agents can trade only after they are born. Furthermore, markets generate interim efficient insurance in some but not all economies because they cannot generate forward (old to young) intergenerational transfers. This market failure, in theory, could be corrected by government intervention. However, as long as government policy is determined by voting, intergenerational transfers might by driven more by redistributive politics than by risk sharing considerations. Successful government intervention can arise, even though agents can only vote after they are born, but only if the young determine policy in every election.

Suggested Citation

Rangel, Antonio and Zeckhauser, Richard J., Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing? (February 1999). NBER Working Paper No. w6949, Available at SSRN: https://ssrn.com/abstract=226400

Antonio Rangel (Contact Author)

California Institute of Technology ( email )

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
47
Abstract Views
1,160
PlumX Metrics