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Optimal Sustainable Intergenerational Insurance

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  • Lancia, Francesco
  • Russo, Alessia
  • Worrall, Tim S

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.

Suggested Citation

  • Lancia, Francesco & Russo, Alessia & Worrall, Tim S, 2020. "Optimal Sustainable Intergenerational Insurance," CEPR Discussion Papers 15540, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15540
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    Cited by:

    1. Daniel Dimitrov, 2022. "Intergenerational Risk Sharing with Market Liquidity Risk," Tinbergen Institute Discussion Papers 22-028/VI, Tinbergen Institute.

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    More about this item

    Keywords

    Intergenerational insurance; Limited commitment; Risk sharing; Social security; Stochastic overlapping generations;
    All these keywords.

    JEL classification:

    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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