The Political Economy of Intergenerational Risk Sharing

Abstract

This paper analyses the political constraints of intergenerational risk sharing. The rst result is that the political process generally does not lead to ex ante optimal insurance. The second result is that in a second best political setting PAYG still contributes to intergenerational risk sharing. The third result is that aging in- creases the discrepancy between rst-best and second-best transfers. The source of the ine¢ ciency is that politicians redistribute to larger and easier swayed cohorts. Ex post redistribution to lower incomes still leads to an outcome that from an ex ante point of view is preferable to a situation without intergenerational transfers.