Optimal public policy à la Ramsey in an endogenous growth model

We use an overlapping generations model with physical and human capital to ascertain the consequences for optimality of a social planner adopting a welfare criterion that treats all generations alike and is respectful of individual preferences. In particular, we consider a social planner who maximiz...

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Bibliographic Details
Published in:Journal of economics (Vienna, Austria) Austria), 2019-10, Vol.128 (2), p.99-118
Main Authors: Del Rey, Elena, Lopez-Garcia, Miguel-Angel
Format: Article
Language:English
Subjects:
Consumption
Decentralization
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Endogenous
Game Theory
Growth models
Human capital
Macroeconomics/Monetary Economics//Financial Economics
Microeconomics
Middle age
Older people
Pensions
Public Finance
Public policy
Retirees
Social and Behav. Sciences
Subsidies
Taxation
Utility functions
Welfare
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Summary:We use an overlapping generations model with physical and human capital to ascertain the consequences for optimality of a social planner adopting a welfare criterion that treats all generations alike and is respectful of individual preferences. In particular, we consider a social planner who maximizes a non-discounted sum of individual utilities à la Ramsey, with consumption levels expressed in terms of output per unit of efficient labour. We show that the optimal growth path does not depend on the precise cardinalization of preferences (i.e., the degree of homogeneity of the utility function) and that it converges to the "Golden Rule" defined in this endogenous growth framework. The instruments available to the social planner are subsidies to the investment in education by the younger generation and lump-sum taxes on the middle-aged and the retirees. Decentralizing the optimum trajectory requires that subsidies to investment in education be negative (i.e., taxes), and that pensions to the elderly be positive along the entire optimal growth path. These results hold regardless of the initial conditions.
ISSN:0931-8658
1617-7134
DOI:10.1007/s00712-018-0643-z