SAFE Working Paper No. 71

  • Daniel Harenberg, Alexander Ludwig, Alexander Ludwig‡b, aETH Zürich
  • Published 2015

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 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 inor decrease the welfare costs from crowding out of capital formation. The net effect depends on the relative strengths of the opposing forces. JEL classification: C68; E27; E62; G12; H55

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Cite this paper

@inproceedings{Harenberg2015SAFEWP, title={SAFE Working Paper No. 71}, author={Daniel Harenberg and Alexander Ludwig and Alexander Ludwig‡b and aETH Z{\"{u}rich}, year={2015} }