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Intergenerational risksharing and equilibrium asset prices

By John Y. Cambell and Yves Nosbusch

Abstract

In the presence of overlapping generations, a social security system, with contingent taxes and benefits, can affect both asset prices and intergenerational risksharing. In a simple model with two risky factors of production—human capital, owned by the young, and physical capital, owned by all older generations—a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital. Such a system reduces precautionary saving and increases the riskbearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, and lowers the price and risk premium of physical capital

Topics: HG Finance
Publisher: Elsevier
Year: 2007
DOI identifier: 10.1016/j.jmoneco.2007.07.002
OAI identifier: oai:eprints.lse.ac.uk:31036
Provided by: LSE Research Online
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