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Pension plan funding, technology choice, and the equity risk premium

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

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Identification Number: 10.1111/j.1467-9442.2011.01657.x


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:
Additional Information: © 2011 The Editors
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 13 Jul 2011 12:51
Last Modified: 17 Oct 2011 10:28

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