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Inequality and Social Discounting

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  • Werning, Ivan
  • Farhi, Emmanuel

Abstract

We explore steady-state inequality in an intergenerational model with altruistically linked individuals who experience privately observed taste shocks. When the welfare function depends only on the initial generation, efficiency requires immiseration: inequality grows without bound and everyone’s consumption converges to zero. We study other efficient allocations in which the welfare function values future generations directly, placing a positive but vanishing weight on their welfare. The social discount factor is then higher than the private one, and for any such difference we find that consumption exhibits mean reversion and that a steady-state, cross-sectional distribution for consumption and welfare exists, with no one trapped at misery.

Suggested Citation

  • Werning, Ivan & Farhi, Emmanuel, 2007. "Inequality and Social Discounting," Scholarly Articles 3451391, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:3451391
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    References listed on IDEAS

    as
    1. B. Douglas Bernheim, 1989. "Intergenerational Altruism, Dynastic Equilibria and Social Welfare," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(1), pages 119-128.
    2. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
    3. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
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