Intergenerational Risksharing and Equilibrium Asset Prices

29 Pages Posted: 25 May 2006 Last revised: 30 May 2022

See all articles by Yves Nosbusch

Yves Nosbusch

London School of Economics & Political Science (LSE)

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2006

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 capital.

Suggested Citation

Nosbusch, Yves and Campbell, John Y., Intergenerational Risksharing and Equilibrium Asset Prices (May 2006). NBER Working Paper No. w12204, Available at SSRN: https://ssrn.com/abstract=900989

Yves Nosbusch

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
59
Abstract Views
954
Rank
648,431
PlumX Metrics