Webb, David C. (2011) Pension plan funding, technology choice, and the equity risk premium. Scandinavian Journal of Economics, 113 (3). pp. 493-524. ISSN 1467-9442
Abstract
In this paper, the impact of Lazear contracts with defined-benefit pensions on aggregate technology composition and the aggregate risk premium is examined. In the presence of capital market constraints affecting workers, defined-benefit pensions bias the economy towards risk-free production. Leveraging the risky technology relaxes the constraints and results in more risky production and a fall in the aggregate risk premium. This effect holds with risky debt and low pension shortfall risk but breaks down with high pension shortfall risk. A key prediction is that as Lazear contracts become less common, risky production will increase and the aggregate risk premium will fall.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.wiley.com/bw/journal.asp?ref=0347-0520 |
| Additional Information: | © 2011 The Editors |
| Library of Congress subject classification: | H Social Sciences > HG Finance |
| Journal of Economic Literature Classification System: | G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure |
| Sets: | Departments > Finance Collections > Economists Online Research centres and groups > Financial Markets Group (FMG) |
| Date Deposited: | 13 Jul 2011 12:51 |
| URL: | http://eprints.lse.ac.uk/37386/ |
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