Intergenerational preference differences and optimal national saving

Abstract

This paper investigates the problem facing national planners who realize that their successors may employ different social welfare criteria for determining economic policies than they do. In such a situation, we show that the present planners may want to leave future generations a smaller capital stock than they would if they thought the stock would be managed in a way consistent with their own preferences. On the other hand, we also identify cases in which the opposite is true. We obtain the results by studying an optimal aggregate growth model the utility function of which changes randomly from one generation to the next. We analyze the model using a system of functional equations in place of the conventional Bellman equation from dynamic programming theory.