Optimal Sustainable Intergenerational Insurance

75 Pages Posted: 23 Dec 2020 Last revised: 4 Feb 2022

See all articles by Francesco Lancia

Francesco Lancia

Ca' Foscari University of Venice; Centre for Economic Policy Research (CEPR); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Alessia Russo

BI Norwegian Business School

Tim S. Worrall

University of Edinburgh

Date Written: January 2022

Abstract

How should successive generations insure each other when the enforcement of transfers between them is limited? This paper examines transfers that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. Consequently, consumption is heteroskedastic and autocorrelated across generations. The optimal intergenerational insurance arrangement is interpreted as a pay-as-you-go social security scheme with means testing and a mixture of flat-rate and contributory-related elements. With logarithmic preferences, the pension received when old depends on the contribution rate paid when young.

Keywords: Intergenerational insurance, Limited Commitment, Risk Sharing, Social Security, stochastic overlapping generations

JEL Classification: D64, E21, H55

Suggested Citation

Lancia, Francesco and Russo, Alessia and Worrall, Tim S., Optimal Sustainable Intergenerational Insurance (January 2022). CEPR Discussion Paper No. DP15540, Available at SSRN: https://ssrn.com/abstract=3753940

Francesco Lancia (Contact Author)

Ca' Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://https://www.unive.it/pag/28365/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Alessia Russo

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Tim S. Worrall

University of Edinburgh ( email )

30 Buccleuch Place
Edinburgh, Scotland EH8 9JY
United Kingdom
(0)131 651 5128 (Phone)

HOME PAGE: http://www.timworrall.com

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