Inequality and social discounting
By: Emmanuel Farhi [and] Ivan Werning
Contributors: Werning, Ivǹ; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 05-13; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 05-13.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Number of pages: 40
Description: To what degree should societies allow inequality to be inherited? What role should estate taxation play in shaping the intergenerational transmission of welfare? We explore these questions by modeling altruistically-linked individuals who experience privately observed taste or productivity shocks. Our positive economy is identical to models with infinite-lived individuals where efficiency requires immiseration: inequality grows without bound and everyone's consumption converges to zero. However, under an intergenerational interpretation, previous work only characterizes a particular set of Pareto-efficient allocations: those that value only the initial generation's welfare. We study other efficient allocations where the social welfare criterion values future generations directly, placing a positive weight on their welfare so that the effective social discount rate is lower than the private one. For any such difference in social and private discounting we find that consumption exhibits mean-reversion and that a steady-state, cross-sectional distribution for consumption and welfare exists, where no one is trapped at misery. The optimal allocation can then be implemented by a combination of income and estate taxation. We find that the optimal estate tax is progressive: fortunate parents face higher average marginal tax rates on their bequests. Keywords: Inequality, Altruism, Private Information, Immiseration, Social Discounting, Optimal Taxation, Estate Taxes, Dynamic Programming. JEL Classifications: C61, C62, D30, D63, D64, D82, H21, H23, H24, H43.
Notes: "April 27, 2005"-- t.p. -- "First draft: June 2004, this version, April 2005"--Abstract, p. 1.

Includes bibliographical references (p. 39-40).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.