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Who should bear the risk of economic growth?

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  • Abreu, Rafael Costa Berriel
  • Costa, Carlos Eugênio da

Abstract

How is aggregate risks optimally shared between workers and retirees? We break this question in two parts. First, how ought risk to be shared between two groups of agents: one which must be provided incentives to make effort and other, which no longer be incentivized? Second, since incentives may be backloaded through pension entitlements, how does backloading optimally vary across states of nature? After formalizing these two aspects of the problem, we show that perfect risk sharing is optimal for log utility and when aggregate productivity growth is i.i.d.. For all other cases, departures from perfect risk sharing are welfare improving if more risk is born by retirees (resp. workers) when productivity growth is persistent (resp. mean reverting). Our numerical implementations however suggest that perfect risk sharing is approximately optimal for commonly used parameter values.

Suggested Citation

  • Abreu, Rafael Costa Berriel & Costa, Carlos Eugênio da, 2020. "Who should bear the risk of economic growth?," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 817, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    • Handle: RePEc:fgv:epgewp:817
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