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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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
Uncontrolled Keywords:	ISI, investment, borrowing constraints, Lazear contracts, leverage, risk sharing
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)
Rights:	http://www.lse.ac.uk/library/rights/LSERO.htm
URL:	http://eprints.lse.ac.uk/37386/

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