Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk.

40 Pages Posted: 21 Oct 2014

See all articles by Daniel Harenberg

Daniel Harenberg

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich; Oxford Economics

Alexander Ludwig

Leibniz Institute for Financial Research SAFE; University of Cologne - Faculty of Management, Economics and Social Sciences

Multiple version iconThere are 3 versions of this paper

Date Written: September 22, 2014

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 and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.

Keywords: social security, idiosyncratic risk, aggregate risk, welfare, insurance, crowding out

JEL Classification: C68, E27, E62, G12, H55

Suggested Citation

Harenberg, Daniel and Ludwig, Alexander, Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk. (September 22, 2014). Max Planck Institute for Social Law and Social Policy Discussion Paper No. 290-14. Available at SSRN: https://ssrn.com/abstract=2512160 or http://dx.doi.org/10.2139/ssrn.2512160

Daniel Harenberg (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Oxford Economics ( email )

United Kingdom

Alexander Ludwig

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

HOME PAGE: http://www.wiso.uni-koeln.de/cmr/alexludwig

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
21
Abstract Views
546
PlumX Metrics