Intergenerational Risk Sharing

Abstract

In this paper we examine government debt and tax-transfer policies than can improve the allocation of risk between generations. Markets cannot allocate risk efficiently between two generations whenever the two generations are not both alive prior to the occurrence of a stochastic event. This implies that government policies transferring risk between generations have the potential to create first-order welfare improvements. Our model provides a non-Keynesian justification for the debt finance of wars and recessions, as well as an added rationale for Social Security type tax-transfer schemes which aid unlucky generations e.g. the Depression generation, at the expense of luckier generations.