Political intergenerational risk sharing

Abstract

In a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality\ud requires intergenerational risk sharing. We compare the level of intergenerational risk sharing chosen by a\ud benevolent government and by an office-seeking politician. In our political system, the transfer of resources\ud across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized\ud returns on the risky asset induce politicians to compensate the old through a PAYG system. This political\ud system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent,\ud and (iii) less responsive to the realization of the shock than the social optimum. This is because the current\ud politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting\ud transfers, and hence overspends

Optimal Decisions on Pension Plans in the Presence of Information Costs and Financial Literacy

“…To obtain this result note that, for any given stochastic variable , we have ; see Varian (). This result is similar to the one stemming from the use of a mean/variance utility function as is done, among others, by D'Amato and Galasso ().…”

“…Our paper has much to do with previous literature on overlapping generation models dealing with consumption and retirement saving in the presence of public pensions (e.g., Samuelson , ; for a broader overview, see Blake ), although the presence of uncertain returns from pension plans makes our case different from the basic ones. Some articles have analyzed pension systems where saving decisions are taken under some degree of uncertainty: Demange () examines the role of macro shocks and intergenerational risk sharing; D'Amato and Galasso () use an overlapping generation model with shocks on aggregate production to compare the optimal and the politically feasible level of intergenerational risk sharing. Similarly to Gordon and Varian (), we model directly the uncertainty from the returns on retirement savings.…”

A Political Economy Model of Earnings Mobility and Redistribution Policy

“…These studies are extended by introducing capital accumulation (Forni , Gonzalez‐Eiras and Niepelt , , Song ), retirement decisions of the elderly (Arawatari and Ono , Conde‐Ruiz, Galasso, and Profeta ), ideology shifts (Song ), risk‐averse agents (Hassler et al . ), wage inequality (Chen and Song ), public debt accumulation (Song, Storesletten, and Zilibotti ), intergenerational risk sharing (D'Amato and Galasso ), and intergenerational mobility (Arawatari and Ono ). These studies assumed that the economic status of each agent persists into the future, thereby removing the effects of earnings mobility over the life cycle.…”

The Political Economy of Intergenerational Risk Sharing

“…This generally leads to a wide range of rationalizable equilibria when the median voter is young and the prediction of maximum taxation when the median voter is old. Following D'Amato and Galasso [2008] this paper proposes that a probabilistic voting model is better suited to analyze the political limits of risk sharing and the e¤ect of aging upon that. In this approach a minority is no longer politically powerless and taxation is an important factor for voters but not necessarily the only one.…”