Discussion Paper Details

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Title: Optimal Sustainable Intergenerational Insurance

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

Publication Date: December 2020

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

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

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.

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Bibliographic Reference

Lancia, F, Russo, A and Worrall, T. 2020. 'Optimal Sustainable Intergenerational Insurance'. London, Centre for Economic Policy Research.