Department of Economics

This paper examines the impact of government policy on the allocation of aggregate risks in a stochastic OG model with production. The market allocation of risk depends significantly on the young generation’s willingness to substitute intertemporally and on government policy. Safe government debt shifts productivity risk from old to young while wage-indexed social security is essentially neutral. I also compare the market allocation to the efficient allocation of risk. The market allocation is generally inefficient, except for the special case of wage-proportional incomes and logarithmic utility. Safe government debt seems to shift risk in the wrong direction.