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ON THE INTERGENERATIONAL SHARING OF COHORT-SPECIFIC SHOCKS ON PERMANENT INCOME

Published online by Cambridge University Press:  08 December 2009

Kenji Miyazaki ,
Makoto Saito  and
Tomoaki Yamada
Kenji Miyazaki
Affiliation:
Hosei University
Makoto Saito*
Affiliation:
Hitotsubashi University
Tomoaki Yamada
Affiliation:
Meiji University
*
Address correspondence to: Makoto Saito, Faculty of Economics, Hitotsubashi University: 2-1, Naka, Kunitachi, Tokyo, 186-8601, Japan; e-mail: makoto@econ.hit-u.ac.jp.
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Abstract

This paper investigates the intergenerational sharing of shocks on the permanent income of new entry cohorts when prior-to-entry markets are missing. When Lucas trees are traded among generations, procyclical cohort-specific shocks are shared partially via the movement of asset prices; cohorts with lower endowments may benefit more from asset pricing dynamics than cohorts with higher endowments. Given a reasonable set of parameters concerning the Japanese labor market, the evaluated welfare loss ranges from 1% to 3% in terms of the certainty equivalence consumption level. The first-best outcome may be achieved by either a combination of subsidies and taxes or the introduction of prior-to-entry markets.

Keywords

Cohort-Specific ShockIntergenerational TransferCapital Income Tax
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 1 , February 2010 , pp. 93 - 118
Copyright
Copyright © Cambridge University Press 2009

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