Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?

33 Pages Posted: 1 Feb 1999

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: January 14, 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 the 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 be 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.

JEL Classification: D51, D52, E60, E61, E62, H11, H21

Suggested Citation

Rangel, Antonio and Zeckhauser, Richard J., Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing? (January 14, 1999). Available at SSRN: https://ssrn.com/abstract=147011 or http://dx.doi.org/10.2139/ssrn.147011

Antonio Rangel (Contact Author)

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Richard J. Zeckhauser

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