Frikk Nesje, University of Oslo and University of Heidelberg
Department seminar. Frikk Nesje is a PhD student at UiO and Research fellow at the University of Heidelberg. He will present a paper entitled "Cross-dynastic Intergenerational Altruism".
A concern for the next generation as such leads to cross-dynastic intergenerational altruism, defined as welfare weights on descendants also in other dynasties. The paper shows that this implies a near-zero rate of pure time preference. This rate is based on the preferences of people rather than abstract normative principles, but cannot be inferred from market behavior. The mechanism is the following: Cross-dynastic intergenerational altruism gives rise to preference externalities because savings for one’s own descendants benefit present members of other dynasties. The external effect becomes less important over time, leading to time inconsistency. In a stationary Markov-perfect equilibrium where dynasties use linear strategies, the equilibrium saving rate is increasing in intergenerational altruism. It is decreasing in the number of dynasties, and reduces to the Brock-Prescott-Mehra saving rate when the number of dynasties is infinitely large. The efficient saving rate with cross-dynastic intergenerational altruism is substantially higher than the equilibrium saving rate, with the wedge increasing in the number of dynasties. This translates into a sizeable reduction in the rate of pure time preference. The analysis makes two additional contributions on social discounting. It provides a new microfoundation for the “hyperbolic” discount function, and exposes a limitation to, and extends, Sen's “isolation paradox”.
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