Working Paper: NBER ID: w12204
Authors: John Y. Campbell; Yves Nosbusch
Abstract: In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.
Keywords: No keywords provided
JEL Codes: G1; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social Security System (H55) | Precautionary Saving (D14) |
| Social Security System (H55) | Risk-Bearing Capacity (H12) |
| Social Security System (H55) | Riskless Interest Rate (E43) |
| Social Security System (H55) | Price of Physical Capital (D24) |
| Social Security System (H55) | Risk Premium on Physical Capital (G31) |