Trading Off Generations: Infinitely-Lived Agent Versus OLG

Abstract

The prevailing literature discusses intergenerational trade-offs in climate change predominantly in terms of the Ramsey equation relying on the infinitely lived agent model. We discuss these trade-offs in a continuous time OLG framework and relate our 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.

Closed-Form Integrated Assessment and Uncertainty

“…The Stern Review justified its low pick of the rate of pure time preference by normative reasoning, market failure, and a dual role of individuals who might behave differently on the market compared to large-picture policy decisions (Hepburn 2006). Schneider et al (2013) show in a continuous time overlapping generations model how the common infinitely-lived-agent based calibration of IAMs overestimates the rate of pure time preference under limited altruism. In addition, the present model, like other IAMs, does not explicitly model the actual portfolio of risky investments and, yet, calibrates to overall investment and the Ramsey equation.…”

The Political Economy of Mitigation and Adaptation

“…We do not distinguish between private discount rates used by one generation to discount their lifetime utility and the social discount rate at which the social planner trades off the weighted lifetime utility of different generations. SeeSchneider et al (2012) on intergenerational trade-offs in OLG models and models with an infinitely lived agent.…”