Social Security and Risk Sharing

41 Pages Posted: 11 May 2006

See all articles by Piero Gottardi

Piero Gottardi

University of Essex - Department of Economics; European University Institute - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia; CESifo (Center for Economic Studies and Ifo Institute)

Felix Kubler

University of Zurich; Swiss Finance Institute

Date Written: October 2006

Abstract

In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex-ante Pareto-improving in a stochastic overlapping generations economy with capital accumulation and land. We argue that these conditions are consistent with many calibrations of the model used in the literature. In our model financial markets are complete and competitive equilibria are interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents' welfare is evaluated ex ante, and arises from the possibility of inducing, through social security, an improved level of intergenerational risk sharing. We will also examine the optimal size of a given social security system as well as its optimal reform. The analysis will be carried out in a relatively simple set-up, where the various effects of social security, on the prices of long-lived assets and the stock of capital, and hence on output, wages and risky rates of returns, can be clearly identified.

Keywords: intergenerational risk sharing, social security, ex ante welfare improvements, interim optimality, price effects

JEL Classification: H55, E62, D91, D58

Suggested Citation

Gottardi, Piero and Kubler, Felix E., Social Security and Risk Sharing (October 2006). CESifo Working Paper Series No. 1705, University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 38/06, Available at SSRN: https://ssrn.com/abstract=901730 or http://dx.doi.org/10.2139/ssrn.901730

Piero Gottardi (Contact Author)

University of Essex - Department of Economics ( email )

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European University Institute - Department of Economics ( email )

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Ca Foscari University of Venice - Dipartimento di Economia ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Felix E. Kubler

University of Zurich ( email )

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Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

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