Intergenerational Risk Sharing and Fiscal Policy

The paper examines the allocation of macroeconomic risks a stochastic growth model with overlapping generations. For several standard models with CRRA preferences, I find laissez faire ex ante inefficient in the direction of imposing too little productivity risk on the old and too much risk on the young and on future generations. Governments commonly issue safe debt and promise safe public pensions, protecting the old and shifting even more risk onto future generations. Such policies are inefficient unless preferences display age-increasing risk aversion. Thus, fiscal institutions seem to treat future generations as if they were more risk tolerant than we are.