Cooperation in target benefit plans: A game theoretical perspective

Many occupational pension plans rely on intergenerational cooperation to deliver stable retirement benefits; however, this cooperation has natural limits and exceeding these limits can threaten the sustainability of the plan. In this project, we cast the problem of intergenerational cooperation within funded pension plans in a game theoretic framework that incorporates overlapping generations and uncertainty in the cost of cooperation. Employing the concept of a subgame perfect equilibrium, we determine the threshold above which cooperation should not be enforced. Using two different processes for the stochastic cost of cooperation, we illustrate the combination of parameters that allow for the existence of a reasonable threshold, and study how the level of prefunding and the stochastic process parameters affect both the threshold and the probability of sanctioned non-cooperation.