Intergenerational Risksharing and Equilibrium Asset Prices

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Intergenerational Risksharing and Equilibrium Asset Prices

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Title: Intergenerational Risksharing and Equilibrium Asset Prices
Author: Nosbusch, Yves; Campbell, John

Note: Order does not necessarily reflect citation order of authors.

Citation: Campbell, John Y., and Yves Nosbusch. 2007. Intergenerational risksharing and equilibrium asset prices. Journal of Monetary Economics 54, no. 8: 2251-2268.
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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
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