Title

Intergenerational debt dynamics without tears

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

1-2020

Journal or Book Title

Review of Economic Dynamics

Volume

35

First Page or Article ID Number

192

Last Page

219

DOI

10.1016/j.red.2019.06.002

Abstract

Governments, motivated by a desire to improve upon long-run laissez faire, routinely undertake enduring, productive expenditures, say, in public education, that generate positive externalities across cohorts but require investments be made up front. If everyone after the policy is initiated is at least as happy as before and there are some outstanding resources, the Hicks-Kaldor efficiency rule suggests that the present value of these resources could, hypothetically, be distributed to future generations creating the potential for generational Pareto improvement. The literature recognizes the challenge in constructing a policy that is actually Pareto-improving since the policy itself may generate general-equilibrium gains and losses spread across generations. The paper takes on this task. In a dynamically-efficient economy with an intergenerational human capital externality, it constructs an equilibrium path with public education financed by non-explosive debt and taxes that truly improves upon laissez faire, yet no generation is harmed along the transition, not even the current ones.

JEL Classification

D91, E21, O41

Comments

This is a working paper of an article published as Andersen, Torben M., and Joydeep Bhattacharya. "Intergenerational debt dynamics without tears." Review of Economic Dynamics 35 (2020): 192-219. doi:10.1016/j.red.2019.06.002. Posted with permission.

Copyright Owner

Elsevier Inc.

Language

en

File Format

application/pdf

Published Version

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