This paper cautions against the belief that markets work efficiently in transmitting across generations the right signals for investment decisions under risk. Overlapping-generation models are used to show that the incompleteness of intergenerational insurance markets constitutes a market failure that leads to inefficient intergenerational investment decisions under risk. Early generations over-diversify if they face risks that are larger than those of the following generation and could, therefore, be shared with them. On the other hand, if risks are increasing from generation to generation, the current generation would under-insure against those risks. Since the direction of the inefficiency depends on the nature of the risk assumed, the policy implications depend on the empirical assessment of the risks that current and future generations are facing. This paper provides applications of the general result to environmental problems such as inefficiently low protection against global warming, the excessive reduction of biodiversity, and inefficient depletion of a natural resource.
This paper was published in: European Economic Review, Volume 39, Issue 8 (1 October 1995), Excessive environmental risks: An intergenerational market failure J. von Amsberg  1447..., Full Article
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