Skip to main content
Article thumbnail
Location of Repository

Pension plan funding, technology choice, and the equity risk premium

By David C. Webb

Abstract

In this paper, the impact of Lazear contracts with defined-benefit pensions on aggregate technology composition and the aggregate risk premium is examined. In the presence of capital market constraints affecting workers, defined-benefit pensions bias the economy towards risk-free production. Leveraging the risky technology relaxes the constraints and results in more risky production and a fall in the aggregate risk premium. This effect holds with risky debt and low pension shortfall risk but breaks down with high pension shortfall risk. A key prediction is that as Lazear contracts become less common, risky production will increase and the aggregate risk premium will fall

Topics: HG Finance
Publisher: Wiley
Year: 2011
DOI identifier: 10.1111/j.1467-9442.2011.01657.x
OAI identifier: oai:eprints.lse.ac.uk:37386
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://www.wiley.com/bw/journa... (external link)
  • http://eprints.lse.ac.uk/37386... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.