New AIAS working paper: The political economy of risk allocation in the pension domain

By David Hollanders

AIAS WP 157


Abstract

This paper analyzes the political economy of risk allocation in the pension domain. In particular three theoretical mathematical models are analyzed that can inform the public and academic debate on pension fund governance. In the first case employers and employees bargain over the allocation of risk and control over the investment risk of the pension fund. if employees are forward-looking and fully informed, a conflict over the investment risk of pension funds will not arise; conflicts may thus be due to participants being ill-informed or to lack of control of the pension fund board. The second case involves the principal-agent problem between the pension fund and asset managers. If ‘performance-pay’ for asset managers is asymmetric, they will have an incentive to increase risk. The third case involves risk sharing and risk allocation between generations. Intergenerational transfers in a pension fund can be efficient from both an ex ante perspective and an interim perspective, but whether young and/or old participants will support them depends on circumstances.


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