Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?

Antonio Rangel, Richard Zeckhauser

NBER Working Paper No. 6949
Issued in February 1999
NBER Program(s):   AG   PE

Are market and voting institutions capable of producing optimal intergenerational risk-sharing? To study this question, we consider a simple endowment economy with uncertainty and overlapping generations. Endowments are stochastic; thus it is possible to increase the welfare of every generation using intergenerational transfers that might depend on the state of the world. We characterize the transfers that are necessary to restore efficiency and compare them to the transfers that take place in markets and voting institutions. Unlike most of that literature, we study both ex-ante and interim risk-sharing. Our main conclusion is that both types of institutions have serious problems. Markets cannot generate ex-ante risk-sharing because agents can trade only after they are born. Furthermore, markets generate interim efficient insurance in some but not all economies because they cannot generate forward (old to young) intergenerational transfers. This market failure, in theory, could be corrected by government intervention. However, as long as government policy is determined by voting, intergenerational transfers might by driven more by redistributive politics than by risk sharing considerations. Successful government intervention can arise, even though agents can only vote after they are born, but only if the young determine policy in every election.

download in pdf format
   (403 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6949

Published: Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?, Antonio Rangel, Richard Zeckhauser. in Risk Aspects of Investment-Based Social Security Reform, Campbell and Feldstein. 2001

Users who downloaded this paper also downloaded* these:
Rangel and Zeckhauser Can Market and Voting Institutions Generate Optimal Intergenerational Risk Sharing?
Rangel w7518 Forward and Backward Intergenerational Goods: A Theory of Intergenerational Exchange
Shiller w6641 Social Security and Institutions for Intergenerational, Intragenerational, and International Risk Sharing
Bernheim and Rangel w11518 Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us