Intergenerational transfers and the social discount rate

This paper investigates the relationship between intergenerational asset transfers and the choice of the discount rate for use in cost-benefit analysis in a model of a competitive overlapping generations economy constrained by a socially managed exhaustible resource. Provided that there are no distortions in capital markets and that all agents hold perfect foresight, cost-benefit techniques will result in a Pareto efficient resource allocation if the discount rate is set equal to the market rate of interest. But since the path of the interest rate depends on the level of intergenerational transfers, cost-benefit techniques do not ensure a socially desirable distribution of welfare between generations; a social optimum will result only if intergenerational transfers are properly chosen and enforced. Decentralized private altruism may result in intergenerational transfers that both present and future individuals would agree are too small if members of the present generation attach positive weight to the general welfare of future generations, not simply their personal descendants. In a world where intergenerational transfers are non-optimal, second-best policy-making may imply a constrained optimum that is inefficient. Together, these findings suggest that cost-benefit analysis is at best a partial criterion to policy formulation that should be used only in conjunction with ethical principles that define the proper distribution of welfare between present and future generations.     

Tax Policy and Human Capital Formation with Public Investment in Education

This paper studies the effects of distortionary taxes and public investment in an endogenous growth OLG model with knowledge transmission. Fiscal policy affects growth in two respects: first, work time reacts to variations of prospective tax rates and modifies knowledge formation; second, public spending enhances labour efficiency but also stimulates physical capital through increased savings. It is shown that Ramsey-optimal policies reduce savings due to high tax rates on young generations, and are not necessarily growth-improving with respect to a pure private system. Non-Ramsey policies that shift the burden on adults are always growth-improving due to crowding-in effects: the welfare of all generations is unambiguously higher with respect to a private system, and there generally exists a continuum of non-optimal tax rates under which long-run growth and welfare are higher than with the Ramsey-optimal policy.     

The Transfer Problem and Intergenerational Allocation in an Overlapping Generations Model

We investigate the transfer problem between two countries in the steady state in a one-sector overlapping generations model and explain how transfers should be shared between the young and old generations of the donor country and allocated across the generations of the recipient country. Except at the golden rule of capital accumulation, the ratios of the burden and distribution of transfers between the young and old generations affect welfare. We obtain the following results. First, the sharing of the transfer burden in the donor country depends on the relative size of two effects, namely, a negative direct effect and a positive indirect effect. If the former exceeds the latter, it is preferable for the donor country to allocate all of the transfer burden to the old generation and vice versa. Second, from the viewpoint of welfare maximization, it is preferable for the recipient country to distribute all of the transfers to the young generation. In contrast to the existing literature, these results suggest that the setting whereby the young generation of the donor country defrays all transfer costs may not be justifiable from the viewpoint of donor welfare maximization.     

Bequests, Inter Vivos Transfers, and Wealth Distribution

This paper constructs a heterogeneous agent overlapping generations model with bequests and inter vivos transfers. In the model, households in the same family line behave strategically to determine their consumption, working hours, gifts, and savings. Calibrating the model to the U.S. economy, the paper measures time preference and parental altruism consistent with the economy's capital-output ratio and the size of intergenerational transfers. The model with intergenerational transfers better explains, although not fully, the wealth distribution of the United States. The paper also analyzes the effects of government policy changes on wealth accumulation, distribution, and social welfare. Journal of Economic Literature Classification Numbers: D31, D64, D91, H31.     

Intergenerational transfers,demographic transition,and altruism: Problems in developing Asia

This paper develops a three‐period overlapping‐generations model where middle‐aged agents care about not only their own lifetime utility but also their old parents' and children's well‐being. The doubly altruistic agents choose amounts of intergenerational transfers to their old parents and children as well as private savings. The government specifies amounts of public transfers from working adults to the dependents. The model also takes the effects of demographic transition on the burdens of supporting the elderly and children into account. Using 23 countries' data from the National Transfer Accounts (NTA ), we estimate the degrees of filial and parental altruism and adjust them for their respective life expectancy and fertility rates. The findings suggest that people in developing countries are more parentally altruistic than those in developed ones while the adjusted degree of filial altruism tends to be low in developing Asia. Our welfare analyses reveal that the developing Asian countries must introduce more comprehensive public welfare programs for the elderly to maximize social welfare. Moreover, their low adjusted degree of filial altruism may trap the developing Asian countries at the low levels of public old‐age support and social welfare as the further demographic transition ensues.     

Environmental Abatement and Intergenerational Distribution

This paper employs an overlapping-generations model to explore the impactof public abatement on private investment and the intergenerationaldistribution of welfare. Whereas public abatement benefits the oldestgenerations in terms of non-environmental welfare, future generations gainmost in terms of environment welfare. The overall benefits tend to besmallest for generations born at the time of the unanticipated policy shock.Public debt policy, however, can be employed to ensure that welfare gainsare distributed more equally across the various generations. Such a policyimplies that natural capital crowds-out man-made capital.     

Growth effects of carbon policies: Applying a fully dynamic CGE model with heterogeneous capital

The paper develops a new type of computable general equilibrium (CGE) model in which growth is fully endogenous, based on the increasing specialization of sector-specific capital varieties. The model is used to simulate the effects of carbon policies on consumption, welfare, and sectoral development in the long run. The benchmark scenario is calculated based on endogenous sector-specific gains from specialization, which carry over to the simulations of a carbon policy following the 2 °C target. Applying the model to the Swiss economy, we find that carbon policy leads to growth rates of knowledge intensive sectors that are higher than in the benchmark and that all the non-energy sectors show positive growth rates. Compared to a state in which climate change has no negative effect, consumption in 2050 is reduced by 4.5% and entails a moderate but not negligible welfare loss.     

Growth,intergenerational welfare,and environmental policies in an overlapping generations economy

This paper examines the effects of the environmental tax on long‐run growth and intergenerational welfare in a discrete‐time overlapping generations (OLG ) model. We highlight that the role regarding how the environmental tax revenues are distributed between the young or old generations has important implications for the growth and welfare effects. Our results indicate that raising the environmental tax can exert different effects on the environmental utility of the existing young and old generations, implying an intergenerational welfare conflict of the environmental policy. However, if tax revenues are distributed appropriately, our numerical simulation shows that it is possible for a higher environmental tax to improve the welfare of all generations.     

How much to share: Welfare effects of fiscal transfers

Recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a fiscal transfer system that could alleviate the negative impact of asymmetric shocks across countries. Using a simple labour production economy, we first derive an analytically tractable solution for optimal degree of fiscal transfers. In this economy, fiscal transfers can improve welfare by moving the competitive equilibrium with fiscal transfers closer to the social planner's solution. We then extend the model to a DSGE setting with capital, international bond and linear taxes, and we analyze how implementation of a simple revenue sharing rule affects welfare and macroeconomic variables over time. Simulation results show that risk sharing through fiscal transfers always improves welfare in the long run. However, under certain model specifications, short‐run transitional welfare loss can outweigh the long‐run benefits. These results suggest that, in designing fiscal transfers across countries, government should take into consideration the intertemporal nature of welfare gains.     

An Overlapping Generations Model of Climate-Economy Interactions

A numerically calibrated overlapping generations model of climate change and the world econommy is examined in this paper. In the absence of intergenerational transfers, efficient rates of greenhouse gas emissions abatement rise from 16% in the present to 25% in the long run, while mean global temperature increases by 7.4°C relative to the preindustrial norm. A utilitarian optimum, which attaches equal weight to each generation's life-cycle utility, yields abatement rates that rise from 48% to 89%, with a long-run temperature increase of 3.4°C. A second-best utilitarian path, in which intergenerational transfers are by assumption institutionally infeasible, also supports stringent abatement measures.     

Equity and efficiency aspects of the Italian debt reduction

The paper deals with the distributional and efficiency consequences of debt reduction in Italy. A reduction of the deficit from six to three percent of GDP is financed by the so-called Eurotax (introduced temporarily or permanently) combined with an adjustment of consumption taxes or public transfers. The quantitative analysis is based on a dynamic simulation model of the Auerbach-Kotlikoff type, which distinguishes between five lifetime income classes within each age cohort. Our simulation results indicate that debt reduction increases the welfare of future generations between 1 and 2% of lifetime resources and that consumption taxes are preferable to the Eurotax on allocative grounds.     

International support of climate change policies in developing countries: Strategic, moral and fairness aspects

International transfers in climate policy channeled from the industrialized to the developing world either support the mitigation of climate change or the adaptation to global warming. From a purely allocative point of view, transfers supporting mitigation tend to be Pareto-improving whereas this is not very likely in the case of adaptation support. We illustrate this by regarding transfer schemes currently applied under the UN Framework Convention on Climate Change (UNFCCC) and the Kyoto framework.However, if we enrich the analysis by integrating distributional aspects, we find that international adaptation funding may help both the developing and developed world. Interestingly this is not due to altruistic incentives, but due to follow-up effects on international negotiations on climate change mitigation. We argue that the lack of fairness perceived by developing countries in the international climate policy arena can be reduced by the support of adaptation in these countries. As we show - taking into account different fairness concepts - this might raise the prospects of success in international negotiations on climate change. Yet, we find that the influence of transfers may induce different fairness effects on climate change mitigation negotiations to run counter.We discuss whether current transfer schemes under the UNFCCC and the Kyoto framework adequately serve the distributive and allocative objectives pursued in international climate policy.     

Climate Change and the Representative Agent

The artifice of an infinitely-lived representative agent iscommonly invoked to balance the present costs and future benefitsof climate stabilization policies. Since actual economies arepopulated by overlapping generations of finite-lived persons,this approach begs important questions of welfare aggregation.This paper compares the results of representative agent andoverlapping generations models that are numerically calibratedbased on standard assumptions regarding climate--economyinteractions. Under two social choice rules -- Pareto efficiencyand classical utilitarianism -- the models generate closelysimilar simulation results. In the absence of policies toredistribute income between present and future generations,efficient rates of carbon dioxide emissions abatement rise from15 to 20% between the years 2000 and 2105. Under classicalutilitarianism, in contrast, optimal control rates rise from 48 to 79% this same period.     

Multilateral Reforms of Trade and Environmental Policy

The paper analyzes environmental tax policy reform using a competitive model of world trade that includes production‐generated environmental damage (pollution) and trade tariffs. The authors examine the feasibility of Pareto‐improving multilateral reforms of environmental taxes, and show that any environmental tax reform that is mutually welfare‐improving when compensating lump‐sum transfers are assumed is also welfare‐improving when a suitable tariff reform (but no transfers) is combined with the tax changes. Several specific reform proposals are developed. These results expand the feasible set of mutually improving policy proposals for international policy initiatives.     

Transfers and the Samuelson Rule in Stock Externality Provision—Why Do We Need Them Both?

This paper examines the relationship between the Samuelson rule for efficient provision of stock externality and unilateral transfers for equalization of mitigation costs among the agents. Using a generic model of stock externality provisions, we proved that the revised Samuelson rule that allows transfers is a necessary and sufficient condition for efficient provision of stock externalities. In addition, selection of social welfare weights of the agents plays a key role in directions and magnitudes of the transfers. We discuss the implications of the revised Samuelson rule in economic modeling of climate change, an empirical case of stock externality, through numerical simulations in the RICE model.     

Environment,public debt,and epidemics

We study whether fiscal policies, especially public debt, can help to curb the macroeconomic and health consequences of epidemics. Our approach is based on three main features: we introduce the dynamics of epidemics in an overlapping generations model to take into account that old people are more vulnerable; people are more easily infected when pollution is high; public spending in health care and public debt can be used to tackle the effects of epidemics. We show that fiscal policies can promote convergence to a stable disease-free steady state. When public policies are not able to permanently eradicate the epidemic, public debt, and income transfers could reduce the number of infected people and increase capital and GDP per capita. As a prerequisite, pollution intensity should not be too high. Finally, we define a household subsidy policy that eliminates income and welfare inequalities between healthy and infected individuals.     

Scientific Ambiguity and Climate Policy

Economic evaluation of climate policy traditionally treats uncertainty by appealing to expected utility theory. Yet our knowledge of the impacts of climate policy may not be of sufficient quality to be described by unique probabilistic beliefs. In such circumstances, it has been argued that the axioms of expected utility theory may not be the correct standard of rationality. By contrast, several axiomatic frameworks have recently been proposed that account for ambiguous knowledge. In this paper, we apply static and dynamic versions of a smooth ambiguity model to climate mitigation policy. We obtain a general result on the comparative statics of optimal abatement and ambiguity aversion, and then extend our analysis to a more realistic, dynamic setting, where we introduce scientific ambiguity into the well-known DICE model of the climate-economy system. For policy-relevant exogenous mitigation policies, we show that the value of emissions abatement increases as ambiguity aversion increases, and that this ‘ambiguity premium’ can in some plausible cases be very large. In these cases the effect of ambiguity aversion on welfare is comparable to that of other much studied welfare parameters. Thus ambiguity aversion may be an important neglected aspect of climate change economics, and seems likely to provide another argument for strong abatement policy.     

Why is the rate of single-parenthood lower in Canada than in the U.S.? A dynamic equilibrium analysis of welfare policies

Abstract .  A critical question in the design of welfare policies is whether to target aid according to household composition, as was done in the U.S. under the Aid to Families with Dependent Children (AFDC) program, or to rely exclusively on means-testing, as in Canada. Restricting aid to single mothers, for instance, has the potential to distort behaviour along three demographic margins: marriage, fertility, and divorce. We contrast the Canadian and the U.S. policies within an equilibrium model of household formation and human capital investment on children. Policy differences we consider are eligibility, dependence of transfers on the number of children, and generosity of transfers. Our simulations indicate that the policy differences can account for the higher rate of single-parenthood in the U.S. They also show that Canadian welfare policy is more effective for fostering human capital accumulation among children from poor families. Interestingly, a majority of agents in our benchmark economy prefers a welfare system that targets single mothers (as the U.S. system does), yet (unlike the U.S. system) does not make transfers dependent on the number of children.     

Sectoral labor adjustment and monetary policy in a small open economy

This paper studies the welfare implications of sectoral labor adjustment cost in a two-sector small open economy model with sticky prices. We find that, when the economy faces external shocks, if monetary policy can stabilize the real economy, then sectoral labor market adjustment cost will lead to welfare loss. However, if monetary policy such as fixed exchange rates cannot stabilize real variables, then some degree of labor market friction will improve welfare instead and the gain will be significant. As a result, the welfare gap between flexible exchange rates and fixed exchange rates decreases with sectoral labor market friction. This is because the friction can offset some of the nominal rigidity and become a substitute for monetary policy to stabilize the real economy.     

Welfare Analysis of a Fiscal Reconstruction Policy in an Overlapping Generations Economy with Public Investment

Constructing an endogenously growing overlapping generations model with public investment, we examine the welfare effects of a fiscal reconstruction policy. In this paper we define a fiscal reconstruction policy as a policy where the government reduces its spending level without changing the tax revenue and allocates the surplus of the revenue to redeem public debt. We show that if government spending is not productive it is possible that a fiscal reconstruction policy improves the utilities of both the current and future generations, while if government spending is productive it can harm the utilities of both generations. Received February 26, 2002; revised version received July 8, 2002 Published online: February 17, 2003