Working Paper: NBER ID: w3354
Authors: Laurence J. Kotlikoff; Robert W. Rosenthal
Abstract: Generational selfishness is a central assumption in the vast literature on the life cycle model. Much of this literature deals with the impact of alternative government policies in light of self-interested generational behavior. Surprisingly, the choices of governments in virtually all of these analyses are assumed to be independent of the preferences of the selfish generations these governments presumably represent. We address this anomaly by modeling each generation as having a government that strictly represents the economy along a number of dimensions. We consider two types of inefficiencies that have received little or no attention in the literature. The first is the monopolization of factor supplies, and the second is the under- or overprovision of durable public goods. We demonstrate that selfish generations may place sizable marginal taxes on their factor supplies in order to monopolize their factor markets. We also show that selfish generations will provide inefficient levels of durable public goods both at the local and national levels. Finally, we demonstrate that generational inefficiencies can arise even in models of cooperative bargaining because of the first-mover advantage of earlier generations.
Keywords: Generational Politics; Public Goods; Inefficiency; Factor Monopolization
JEL Codes: D63; H23; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| generational selfishness (D64) | sizable marginal taxes (H29) |
| sizable marginal taxes (H29) | monopolization of factor supplies (L12) |
| generational selfishness (D64) | distortionary taxes on labor and savings (H31) |
| distortionary taxes on labor and savings (H31) | reduction in supply of labor and savings (J20) |
| reduction in supply of labor and savings (J20) | increase in market returns (G19) |
| generational selfishness (D64) | inefficient levels of durable public goods (H49) |
| changes in asset prices (G19) | offsets incentives for public goods provision (H49) |
| earlier generations (B15) | advantage in cooperative bargaining (C71) |
| advantage in cooperative bargaining (C71) | inefficiencies in resource allocation (D61) |