Alessia Russo, University of Padova

"Intergenerational Insurance"

Abstract

How should an intergenerational insurance arrangement be structured when a benevolent social planner has limited enforcement power? This paper examines intergenerational insurance policies that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. The risk from a transitory generational shock is unevenly spread into the future, generating long run risk. The optimal intergenerational insurance arrangement provides the basis for the design of a sustainable public debt. Debt dynamics are characterized by an endogenously-derived maximum sustainable debt, above which the participation constraints cannot be satisfied, and a critical level of debt, below which debt stabilizes and above which debt rolls over.

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