Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes

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This paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. We show that some plausible social welfare functions lead to time-inconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. The normative prescriptions of a time-consistent utilitarian planner generalize the 'two-part Golden Rule" suggested by Samuelson, and imply aggregate dynamics similar to those arisingin the Cass-Koopmans-Ramsey optimal growth framework. We characterize lump-sum transfer schemes that allow the optimal allocation to be decentralized as the competitive equilibrium of an economy with actuarially fair annuities. The lump-sum transfers that accomplish this decentralization are age dependent in general.

Published: "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes: Analysis and Extensions." From Economic Effectts of the Government Budget, edited by Elhanan Helpman, Assaf Razin, and Efraim Sadka, pp. 163-198. Cambridge, MA: MIT Press, 1988.

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