Working Paper: NBER ID: w1730
Authors: Roger H. Gordon; Hal R. Varian
Abstract: In this paper, we argue that in designing government debt and tax-transfer policies, it is important to consider their implications for the allocation of risk between generations. There is no reason to presume that the market or the family can allocate risk efficiently to future generations, implying that stochastic government policies have the potential to create first-order welfare improvements. The model provides a non-Keynsian justification for debt-finance of wars and recessions, as well as an added rationale for Social Security type tax-transfer schemes which aid unlucky generations, e.g., the Depression generation,at the expense of luckier generations.
Keywords: intergenerational risk sharing; government debt; tax-transfer policies
JEL Codes: H2; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government policies (H59) | first-order welfare improvements (D60) |
| government debt and tax-transfer policies (H69) | risk sharing among generations (D15) |
| government policies (H59) | expected utility for future generations (D15) |
| debt financing of wars and recessions (H63) | reallocating wealth across generations (D15) |
| social security-type tax-transfer schemes (H55) | aid unlucky generations (J19) |
| optimal risk-sharing schemes (C71) | Pareto improvements (D61) |
| moral hazard in tax-transfer schemes (H23) | reduce overall effectiveness of risk-sharing policies (G52) |