The Political Economy of Intergenerational Risk Sharing

This paper analyses the political constraints of intergenerational risk sharing. The first 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 increases the discrepancy between first-best and second-best transfers. The source of the inefficiency 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