Social security in an analytically tractable overlapping generations model with aggregate and idiosyncratic risks

Open access
Date
2015-08Type
- Journal Article
Abstract
When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations. We derive the equilibrium dynamics in closed form and show that the joint presence of both risks leads to overproportional risk exposure for households. This implies that the whole benefit from insurance through social security is greater than the sum of the benefits from insurance against each of the two risks in isolation. We measure this through interaction effects which appear even though the two risks are orthogonal by construction. While the interactions unambiguously increase the welfare benefits from insurance, they can increase or decrease the welfare costs from crowding-out of capital formation. The net effect depends on the relative strengths of the opposing forces. Show more
Permanent link
https://doi.org/10.3929/ethz-b-000104534Publication status
publishedExternal links
Journal / series
International Tax and Public FinanceVolume
Pages / Article No.
Publisher
SpringerSubject
Social security; Idiosyncratic risk; Aggregate risk; Welfare; InsuranceOrganisational unit
03877 - Bommier, Antoine / Bommier, Antoine
Related publications and datasets
Is new version of: https://doi.org/10.3929/ethz-a-010243206
Notes
It was possible to publish this article open access thanks to a Swiss National Licence with the publisher.More
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