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| Author: | Grant, S. Quiggin, J. |
| Title: | The Risk Premium for Equity: Implications for the Proposed Diversification of the Social Security Fund |
| Journal: | American Economic Review
2002 : SEP, VOL. 92:4, p. 1104-1115 |
| Index terms: | RISK PREMIUM FUNDS DIVERSIFICATION MODELS |
| Language: | eng |
| Abstract: | The object of this paper is to examine these issues in a simple two-period model, which permits the derivation of an analytical solution to the problem of determining equilibrium asset prices in the presence of undiversifiable risk associated with adverse selection problems. The approach is, therefore, similar to that of Mankiw (1986) and Philippe Well (1992). The authors' innovation is to introduce a government with the power to levy a proportional labor income tax and an obligation to make a specific defined payment in the second period. The authors also allow government investment in equity and compare the effects of such investments with and without complete risk pooling in private capital markets. |
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