On the Intergenerational Sharing of Cohort-Specific Shocks on Permanent Income

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.