Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes
AbstractThis paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. We show that some plausible social welfare functions lead to time-inconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. The normative prescriptions of a time-consistent utilitarian planner generalize the 'two-part Golden Rule" suggested by Samuelson, and imply aggregate dynamics similar to those arisingin the Cass-Koopmans-Ramsey optimal growth framework. We characterize lump-sum transfer schemes that allow the optimal allocation to be decentralized as the competitive equilibrium of an economy with actuarially fair annuities. The lump-sum transfers that accomplish this decentralization are age dependent in general.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1593.
Date of creation: Mar 1985
Date of revision:
Publication status: published as "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes: Analysis and Extensions." From Economic Effectts of the Government Budget, edited by Elhanan Helpman, Assaf Razin, and Efraim Sadka, pp. 163-198. Cambridge, MA: MIT Press, 1988.
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