Intergenerational Altruism and Social Welfare: A Critique of the Dynastic Model
NBER Working Paper No. 2288
In this paper, I show that, under relatively weak conditions, dynastic equilibria are never welfare optima. If a social planner sets policy to maximize a social welfare function, then, except in extreme cases where the planner cares only about a single generation, successive generations will never be linked through altruistically motivated transfers. This suggests that the dynastic model is unsuitable for normative analysis, and, to the extent governments actually behave in this manner, the model is also inappropriate for positive analysis. In addition, I show that, except in a few special cases, the planner's preferences are dynamically inconsistent. If the planner can successfully resolve this inconsistency, then the central result is somewhat modified.
Published: "Intergenerational Altruism, Dynastic Equilibria, and Social Welfare." Review of Economic Studies, Vol. 56, pp. 118-128, January 1989.