Abstract
The prevailing literature discusses intergenerational trade-offs in climate change predominantly in terms of the Ramsey equation relying on the infinitely lived agent model. We discuss these trade-offs in a continuous time OLG framework and relate our results to the infinitely lived agent setting. We identify three shortcomings of the latter: First, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies.
Highlights
How much should a government invest in public infrastructure or in basic research? And how much should society invest in greenhouse gas mitigation? These decision problems exhibit two important common characteristics: a classical public good problem and an intergenerational equity trade-off
Life time utilities of the overlapping generations (OLG) as, e.g., Calvo and Obstfeld (1988) or Burton (1993). We show that this utilitarian OLG economy is observationally equivalent to an appropriately chosen infinitely-lived agent (ILA) economy
As intergenerational trade-offs are mostly discussed in ILA frameworks rather than in OLG models, we investigate how the macroeconomic observables of an OLG and ILA economy relate to each other
Summary
How much should a government invest in public infrastructure or in basic research? These decision problems exhibit two important common characteristics: a classical public good problem and an intergenerational equity trade-off. Doing so inevitably involves a distributional choice between current and future generations. Most models address the distributional component using an infinitely-lived agent (ILA) framework where the utility of the ILA is interpreted as a utilitarian social welfare function. The normative approach takes the standpoint that only ethical considerations are valid to address the intergenerational trade-off. These two approaches generally lead to significantly different results that can be traced back to the difference in the implied social discount rate
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