Working Paper: NBER ID: w2068
Authors: Laurence J. Kotlikoff; Torsten Persson; Lars E. O. Svensson
Abstract: This paper presents a new solution to the time-consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work. The solution involves formulating a law, institution, or agreement that specifies the optimal ex ante policy and that can be sold by successive old generations to successive young generations. Each young generation pays for the law through the payment of taxes. Both old and young generations have an economic incentive to obey the law. For the old generation that owns the law, breaking the law makes the law valueless, and the generation suffers a capital loss. For the young generation the economic advantage of purchasing the existing law exceeds its cost as well as the economic gain from setting up the law.
Keywords: time consistency; fiscal policy; intergenerational contracts; laws as assets
JEL Codes: H21; H23; D78
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Old Generation (owns law) (K11) | Law Value (decreases if broken) (K49) |
| Law Value (decreases if broken) (K49) | Capital Loss (incentivizes adherence) (G32) |
| Young Generation (purchases law) (K36) | Economic Advantage (exceeds costs) (O22) |
| Economic Advantage (exceeds costs) (O22) | Compliance (H26) |
| Old Generation (owns law) (K11) | Capital Loss (incentivizes adherence) (G32) |
| Young Generation (purchases law) (K36) | Compliance (H26) |