The optimum structure for government debt

Kuhle, Wolfgang

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URL:	https://ub-madoc.bib.uni-mannheim.de/2611
URN:	urn:nbn:de:bsz:180-madoc-26112
Document Type:	Working paper
Year of publication:	2009
The title of a journal, publication series:	MEA Discussion Papers
Volume:	194
Place of publication:	Mannheim
Publication language:	English
Institution:	School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series:	Veröffentlichungen des MEA (Mannheim Research Institute For the Economics of Aging) > MEA Discussion Papers
Subject:	330 Economics
Classification:	JEL: H55 ,
Subject headings (SWD):	Öffentliche Schulden , Mehrgenerationenmodell , Pareto-Verteilung , Risikoverteilung
Keywords (English):	public debt , implicit , explicit , (ex-ante) pareto-efficiency , risk-sharing
Abstract:	This article studies the structural differences between implicit and explicit government debt in a two-generations-overlapping model with stochastic factor-prices. If a government can issue safe bonds and new claims to wage-indexed social security to service a given initial obligation, there exists a set of Pareto-efficient ways to do so. This set is characterized by the conflicting interests of the current young and the yet unborn generations regarding the allocation of factor-price risks. However, it is shown that there will always exist a simple intertemporal compensation mechanism which allows to reconcile these conflicting interests. This compensation mechanism narrows the set of Pareto-efficient debt structures until only one remains. This result hinges on the double-incomplete markets structure of stochastic OLG models where households can neither trade consumption-loans nor factor-price risks privately.
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