Discussion Paper Details

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Title: Optimal Sustainable Intergenerational Insurance

Author(s): Francesco Lancia, Alessia Russo and Tim S Worrall

Publication Date: January 2022

Keyword(s): Intergenerational insurance, Limited Commitment, Risk Sharing, Social Security and stochastic overlapping generations

Programme Area(s): Macroeconomics and Growth and Public Economics

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.

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Bibliographic Reference

Lancia, F, Russo, A and Worrall, T. 2022. 'Optimal Sustainable Intergenerational Insurance'. London, Centre for Economic Policy Research.