Sustainable Intergenerational Insurance

Timothy Worrall, Alessia Russo, Francesco Lancia

Research output: Contribution to conferencePaper

Abstract / Description of output

This paper studies the dynamic and steady state properties of optimal intergenerational insurance when enforcement is limited. It considers a pure exchange and stochastic overlapping generations economy. The optimal allocation is chosen by a benevolent government whose welfare function values the initial old and places a positive, but vanishing weight on the welfare of future generations. The optimal allocation is constrained to be self-enforceable. That is, generations must have no incentive to default on the consumptional location at any history of states. We show that the optimal intergenerational insurance when enforcement is limited takes the form of a history-dependent pension plan payable by the young to the old generation. In a simple two-state example we show how the degree of insurance depends on the history of states, in particular, insurance falls with more consecutive good states for the young but reverts whenever the bad state occurs. Finally, we solve for the optimal time-dependent and stationary contracts and numerically compare the welfare loss of these schemes relative to the fully optimal history-dependent scheme.
Original languageEnglish
Publication statusPublished - Jun 2017
EventSociety for Economic Dynamics - University of Edinburgh, Edinburgh, United Kingdom
Duration: 22 Jun 201724 Jun 2017


ConferenceSociety for Economic Dynamics
Country/TerritoryUnited Kingdom

Keywords / Materials (for Non-textual outputs)

  • intergenerational transfers
  • risk sharing
  • stochastic overlapping generations
  • limited commitment


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