Optimal Sustainable Intergenerational Insurance

69 Pages Posted: 23 Dec 2020

See all articles by Francesco Lancia

Francesco Lancia

University of Salerno; Centre for Economic Policy Research (CEPR); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Alessia Russo

BI Norwegian Business School

Tim S. Worrall

University of Edinburgh

Date Written: December 1, 2020

Abstract

Optimal intergenerational insurance is examined in a stochastic overlapping generations endowment economy with limited enforcement of risk-sharing transfers. Transfers are chosen by a benevolent planner who maximizes the expected discounted utility of all generations while respecting the participation constraint of each generation. We show that the optimal sustainable intergenerational insurance is history dependent. The risk from a shock is unevenly spread into the future, generating heteroscedasticity and autocorrelation of consumption even in the long run. The optimum can be interpreted as a social security scheme characterized by a minimum welfare entitlement for the old and state-contingent entitlement thresholds.

JEL Classification: D64, E21, H55

Suggested Citation

Lancia, Francesco and Russo, Alessia and Worrall, Tim S., Optimal Sustainable Intergenerational Insurance (December 1, 2020). CEPR Discussion Paper No. DP15540, Available at SSRN: https://ssrn.com/abstract=3753940

Francesco Lancia (Contact Author)

University of Salerno ( email )

Via Giovanni Paolo II, 132
Fisciano, Salerno 84084
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( 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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