Environmental and Resource Economics

, Volume 68, Issue 1, pp 129–173 | Cite as

Self-Enforcing Intergenerational Social Contracts for Pareto Improving Pollution Mitigation

  • Nguyen Thang Dao
  • Kerstin Burghaus
  • Ottmar Edenhofer
Article

Abstract

We consider, in an overlapping generations model with an environmental externality, a scheme of contracts between any two successive generations. Under each contract, agents of the young generation invest a share of their labor income in pollution mitigation in exchange for a transfer in the second period of their lives. The transfer is financed in a pay-as-you-go manner by the next young generation. Different from previous work we assume that the transfer is granted as a subsidy to capital income rather than lump sum. We show that the existence of a contract which is Pareto improving over the situation without contract for any two generations requires a sufficiently high level of income. In a steady state with social contracts in each period, the pollution stock is lower compared to a steady state without contracts. Analytical and numerical analysis of the dynamics under Nash bargaining suggests that under reasonable conditions, also steady state income and welfare are higher. Delaying the implementation of a social contract for too long or imposing a contract with too low mitigation can be costly: Net income may inevitably fall below the threshold in finite time so that Pareto improving mitigation is no longer possible and the economy converges to a steady state with high pollution stock and low income and welfare. In the second part of the paper, we study a game theoretic setup, taking into account that credibly committing to a contract might not be possible. We show that with transfers granted as a subsidy to capital income, there exist mitigation transfer schemes which are both Pareto improving and give no generation an incentive to deviate from any of its contracts even in a dynamically efficient economy. Social contracts coexist with private savings.

Keywords

OLG models Pollution Mitigation Social contract Pareto improvement Self-enforcing 

JEL Classification

D62 D64 E21 Q54 

References

  1. Abdychev A, Jirasavetakul L-BF, Jonelis A, Leigh L, Moheeput A, Parulian F, Touna Mama A (2015) Increasing productivity growth in middle income countries. IMF working paper No. 15/2Google Scholar
  2. Anderberg D, Balestrino A (2003) Self-enforcing intergenerational transfer and the provision of education. Economica 70:55–71CrossRefGoogle Scholar
  3. Andreoni J, Levinson A (2001) The simple analytics of the environmental Kuznets curve. J Publ Econ 80(2):269–286CrossRefGoogle Scholar
  4. Boldrin M, Rustichini A (2000) Political equilibria with social security. Rev Econ Dyn 3:41–78CrossRefGoogle Scholar
  5. Bovenberg LA, Heijdra BJ (1998) Environmental tax policy and intergenerational redistribution. J Publ Econ 67:1–24CrossRefGoogle Scholar
  6. Bovenberg LA, Heijdra BJ (2002) Environmental abatement and intergenerational distribution. Environ Resour Econ 23:45–84CrossRefGoogle Scholar
  7. Cigno A (1993) Intergenerational transfers without altruism: family, market and state. Eur J Polit Econ 9(4):505–518CrossRefGoogle Scholar
  8. Cigno A (2006a) A constitutional theory of the family. J Popul Econ 19(2):259–283CrossRefGoogle Scholar
  9. Cigno A (2006b) The political economy of intergenerational cooperation. Handb Econ Giv Altruism Recipr 2:1505–1558CrossRefGoogle Scholar
  10. Dao NT, Edenhofer O (2014) On the fiscal strategies of escaping poverty-environment traps (and) towards sustainable growth. CESifo working paper No. 48654Google Scholar
  11. Dao NT, Dávila J (2014) Implementing steady state efficiency in overlapping generations economies with environmental externalities. J Publ Econ Theory 16(4):620–649CrossRefGoogle Scholar
  12. Fodha M, Seegmuller T (2014) Environmental quality, public debt and economic development. Environ Resour Econ 57(4):487–504CrossRefGoogle Scholar
  13. Foley DK (2009) The economic fundamentals of global warming. In: Harris JM, Goodwin NR (eds) Twenty-first century macroeconomics: responding to the climate challenge. Edward Elgar, Cheltenham, pp 115–126Google Scholar
  14. Gale D (1973) Pure exchange equilibrium of dynamic economic models. J Econ Theory 6:12–36CrossRefGoogle Scholar
  15. Gerlagh R, Keyzer MA (2001) Sustainability and the intergenerational redistribution of natural resource entitlements. J Publ Econ 79:315–341CrossRefGoogle Scholar
  16. Goenka A, Jafarey S, Pouliot W et al (2012) Pollution, mortality and optimal environmental policy. Technical reportGoogle Scholar
  17. Gradus R, Smulders S (1993) The trade-off between environmental care and long-term growth: pollution in three prototype growth models. J Econ 58(1):25–51CrossRefGoogle Scholar
  18. Gutiérrez M-J (2008) Dynamic inefficiency in an overlapping generation economy with pollution and health costs. J Publ Econ Theory 10(4):563–594CrossRefGoogle Scholar
  19. Hammond P (1975) Charity: Altruism or cooperatice egoism? In: Phelps ES (ed) Altruism, morality, and economic theory. Russel Sage, New York, pp 115–131Google Scholar
  20. John A, Pecchenino R (1994) An overlapping generations model of growth and the environment. Econ J 1393–1410Google Scholar
  21. Jouvet P-A, Michel P, Vidal J-P (2000) Intergenerational altruism and the environment. Scand J Econ 102(1):135–150CrossRefGoogle Scholar
  22. Karp L, Rezai A (2014) The political economy of environmental policy with overlapping generations. Int Econ Rev 55(3):711–733CrossRefGoogle Scholar
  23. Karp L, Rezai A (2015) Asset prices and climate policy. mimeoGoogle Scholar
  24. Kotlikoff LJ, Persson T, Svensson LE (1988) Social contracts as assets: a possible solution to the time-consistency problem. Am Econ Rev 662–677Google Scholar
  25. Nash JF Jr (1950) The bargaining problem. Econometrica 18(2):155–162CrossRefGoogle Scholar
  26. Nordhaus WD (2008) A question of balance: weighing the options on global warming policies. Yale University Press, New HavenGoogle Scholar
  27. Nordhaus WD, Boyer J (2000) Warming the world. MIT Press, CambridgeGoogle Scholar
  28. Ono T (1996) Optimal tax schemes and the environmental externality. Econ Lett 53(3):283–289CrossRefGoogle Scholar
  29. Rangel A (2003) Forward and backward intergenerational goods: why is social security good for the environment? Am Econ Rev 93:3CrossRefGoogle Scholar
  30. Rausch S, Metcalf GE, Reilly JM, Paltsev S (2010) Distributional implications of alternative US greenhouse gas control measures. BE J Econ Anal Policy 10:2Google Scholar
  31. Rausch S, Metcalf GE, Reilly JM (2011) Distributional impacts of carbon pricing: a general equilibrium approach with micro-data for households. Energy Econ 33:S20–S33CrossRefGoogle Scholar
  32. Rezai A, Foley DK, Taylor L (2012) Global warming and economic externalities. Econ Theory 49:329–351CrossRefGoogle Scholar
  33. Samuelson P (1958) An exact consumption-loan model of interest with or without the social contrivance of money. J Polit Econ 66(6):467–482CrossRefGoogle Scholar
  34. Shell K (1971) Notes on the economics of infinity. J Polit Econ 79(5):1002–1011CrossRefGoogle Scholar
  35. Stern N (2007) The economics of climate change: the stern review. Cambridge University Press, CambridgeCrossRefGoogle Scholar
  36. von Below D, Dennig F, Jaakkola N (2016) The climate pension deal: an intergenerational bargain. mimeoGoogle Scholar
  37. Wang M, Zhao J, Bhattacharya J (2015) Optimal health and environmental policies in a pollution-growth nexus. J Environ Econ Manag 71:160–179CrossRefGoogle Scholar
  38. Weil P (2008) Overlapping generations: the first jubilee. J Econ Perspect 22(4):115–134CrossRefGoogle Scholar
  39. Williams RC, Gordon HG, Burtraw D, Carbone JC, Morgenstern RD (2014) The initial incidence of a carbon tax across income groups. Resources for the future discussion paper, 14–24Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2017

Authors and Affiliations

  • Nguyen Thang Dao
    • 1
  • Kerstin Burghaus
    • 1
  • Ottmar Edenhofer
    • 1
    • 2
    • 3
  1. 1.Mercator Research Institute on Global Commons and Climate ChangeBerlinGermany
  2. 2.Potsdam Institute for Climate Impact ResearchPotsdamGermany
  3. 3.Department of Economics of Climate ChangeTechnical University of BerlinBerlinGermany

Personalised recommendations