Intergenerational Risk Sharing

In this paper, we argue that in designing government debt and tax-transfer policies, it is important to consider their implications for the allocation of risk between generations. There is no reason to presume that the market or the family can allocate risk efficiently to future generations, implying that stochastic government policies have the potential to create first-order welfare improvements. The model provides a non-Keynsian justification for debt-finance of wars and recessions, as well as an added rationale for Social Security type tax-transfer schemes which aid unlucky generations, e.g., the Depression generation,at the expense of luckier generations.