Trading Off Generations: Infinitely-Lived Agent Versus OLG

By Maik T. Schneider, Christian Traeger and Ralph Winkler

http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1007&r=dge

The prevailing literature discusses intergenerational trade-offs predominantly in infinitely-lived agent models despite the finite lifetime of individuals. We discuss these trade-offs in a continuous time OLG framework and relate the results to the infinitely-lived agent setting. We identify three shortcomings of the latter: First, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies. Regarding the recent debate on climate change, we conclude that it is indispensable to explicitly consider the generations’ life cycles.

It is pretty obvious humans are finitely-lived, yet we often model them as infinitely-lived. This is quite convenient, but does it matter? Naturally, this depends on the research question. Also, we all know that if there is a sufficient level of intergenerational altruism, the two approaches are essentially equivalent. This paper looks at the analysis of climate change, where policy to a large extend makes only sense if we care for future generations. Thus, is modeling infinitely-lived agents still bad?

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