Laws as Assets: A Possible Solution to the Time Consistency Problem

Laurence J. Kotlikoff, Torsten Persson, Lars E.O. Svensson

NBER Working Paper No. 2068 (Also Reprint No. r1081)
Issued in November 1986
NBER Program(s):Public Economics

This paper presents a new solution to the time-consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work. The solution involves formulating a law, institution, or agreement that specifies the optimal ex ante policy and that can be sold by successive old generations to successive young generations. Each young generation pays for the law through the payment of taxes. Both old and young generations have an economic incentive to obey the law. For the old generation that owns the law, breaking the law makes the law valueless, and the generation suffers a capital loss. For the young generation the economic advantage of purchasing the existing law exceeds its cost as well as the economic gain from setting up the law.

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Document Object Identifier (DOI): 10.3386/w2068

Published: "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem." From American Economic Review, Vol. 78, No. 4, pp. 662-677,(September 1988).

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