Some Inefficiency Implication of Generational Politics and Exchange

Laurence Kotlikoff () and Robert W. Rosenthal

No 3354, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1994-01
Note: AG PE
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