NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Some Inefficiency Implication of Generational Politics and Exchange

Laurence J. Kotlikoff, Robert W. Rosenthal

NBER Working Paper No. 3354 (Also Reprint No. r1838)*
Issued in January 1994
NBER Program(s):   AG    PE

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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.

*Published: Economics and Politics, Vol. 5, No. 1, pp. 27-42 (March 1993)

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