TY  - JOUR
AU  - Campbell,John Y.
AU  - Nosbusch,Yves
TI  - Intergenerational Risksharing and Equilibrium Asset Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12204
PY  - 2006
Y2  - May 2006
UR  - http://www.nber.org/papers/w12204
L1  - http://www.nber.org/papers/w12204.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Yves Nosbusch
Harvard University
E-Mail: nosbusch@fas.harvard.edu
M2  - featured in NBER digest on 2006-05-08
AB  - 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.
ER  -