Pension Systems and the Allocation of Macroeconomic Risk

This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall “life-cycle” risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are ∗Address: Prof. Lans Bovenberg, FEW, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, THE NETHERLANDS. e-mail: [email protected], fax: +31-13-4663066, home page http://center.uvt.nl/staff/bovenberg/. Prof. Harald Uhlig, Humboldt University, Wirtschaftswissenschaftliche Fakultät, Spandauer Str. 1, 10178 Berlin, GERMANY. e-mail: [email protected], fax: +49-30-2093 5934, home page http://www.wiwi.huberlin.de/wpol/. This research was supported by the Deutsche Forschungsgemeinschaft through the SFB 649 ”Economic Risk”. We are grateful to Christian Stoltenberg for his research assistance.