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Social Credibility, Social Patience and Long Run Inequality

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  • Christopher Sleet
  • Sevin Yeltekin

Abstract

This paper considers optimal social insurance in a dynamic moral hazard economy. The existing literature has focussed on environments in which a planner and a population of agents share the same discount factor. A key finding is that agents are then almost surely immiserated; their welfare is driven to its lowest bound. Such immiseration requires a social commitment to treat (almost) everyone arbitrarily badly in the long run. We argue that this is implausible. We establish an equivalence between optimal allocations in two environments: those in which the planner lacks commitment and is constrained to choose socially credible policies and those in which the planner’s discount factor exceeds the agents’. We show that immiseration result no longer holds in the second environment. Optimal allocations in this environment are characterised by social mobility and a degree of inequality that it is falling in the planner’s discount factor. The credibility constrained economy inherits the no immiseration and social mobility properties. 1

Suggested Citation

  • Christopher Sleet & Sevin Yeltekin, "undated". "Social Credibility, Social Patience and Long Run Inequality," GSIA Working Papers 2006-E36, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:722839510
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    Cited by:

    1. Mele, Antonio, 2014. "Repeated moral hazard and recursive Lagrangeans," Journal of Economic Dynamics and Control, Elsevier, vol. 42(C), pages 69-85.
    2. Christopher Sleet & Sevin Yeltekin, 2006. "Credibility and endogenous societal discounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 410-437, July.
    3. Matthias Messner & Nicola Pavoni & Christopher Sleet, "undated". "Contractive Dual Methods for Incentive Problems," GSIA Working Papers 2012-E26, Carnegie Mellon University, Tepper School of Business.

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