Intergenerational Risksharing and Equilibrium Asset Prices: An Economy with Factor Accumulation

In an OLG (overlapping generations) economy with only two risky factors of production, human capital and physical capital, a social security system that optimally shares risks among generations was incorporated. By allowing for physical capital acumulation, this paper extends John Compbell's fixed supplies of asset economy into a dynamic environment. Under certain conditions, this new system has milder effects than Campbell's on risk-free interest rate, and prices and risk premium of physical capital. We also find that the level of human capital could make the system's effects on asset markets ambiguous and steady state physical capital stock is lower in the long run equilibrium.