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

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

Abstract

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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File URL: http://www.nber.org/papers/w2068.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2068.

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Date of creation: Nov 1986
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Publication status: published as "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).
Handle: RePEc:nbr:nberwo:2068

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  1. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 93-107, May.
  2. Jonathan Eaton, 1985. "Lending with Costly Enforcement of Repayment and Potential Fraud," NBER Working Papers 1697, National Bureau of Economic Research, Inc.
  3. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 55-93.
  4. Rogoff, Kenneth, 1987. "Reputational constraints on monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 26(1), pages 141-181, January.
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  6. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  7. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1987. "Time Consistency of Fiscal and Monetary Policy," Econometrica, Econometric Society, Econometric Society, vol. 55(6), pages 1419-31, November.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  9. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
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Cited by:
  1. Philippe Weil, 2008. "Overlapping generations: the first jubilee," ULB Institutional Repository 2013/13430, ULB -- Universite Libre de Bruxelles.
  2. Casey B. Mulligan & Xavier Sala-i-Martin & Ricard Gil, 2003. "Do Democracies Have Different Public Policies than Nondemocracies?," NBER Working Papers 10040, National Bureau of Economic Research, Inc.
  3. Michele Boldrin & Ana Montes, 2004. "The intergenerational state: education and pensions," Staff Report, Federal Reserve Bank of Minneapolis 336, Federal Reserve Bank of Minneapolis.
  4. repec:spo:wpecon:info:hdl:2441/8712 is not listed on IDEAS
  5. Laurence J. Kotlikoff, 1986. "Is Debt Neutral in the Life Cycle Model?," NBER Working Papers 2053, National Bureau of Economic Research, Inc.

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