Some Inefficiency Implication of Generational Politics and Exchange
Laurence J. Kotlikoff
Robert W. Rosenthal
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.
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