| Abstract: | We study risk‐sharing through public debt in a two‐generations‐overlapping model. If bonds and wage‐indexed social security service a given initial obligation, there exists a set of Pareto‐efficient debt structures. This set is characterized by conflicting interests of current and yet unborn cohorts over the factor‐price risk allocation. If both size and composition of the debt are choice variables, these conflicting interests can be reconciled. Changes in the debt's composition reallocate factor‐price risks, while changes in its size reallocate resources. This separation of risk‐sharing and crowding‐out narrows the set of efficient debt structures until only one remains. |
