Optimal Sustainable Intergenerational Insurance
75 Pages Posted: 23 Dec 2020 Last revised: 4 Feb 2022
Date Written: January 2022
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
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