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

By David C. Webb


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:
Provided by: LSE Research Online
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