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Cross-dynastic intergenerational altruism

Abstract: A concern for sustainability leads to cross-dynastic intergenerational altruism, defined as welfare weights on descendants also in other dynasties. Cross-dynastic intergenerational altruism gives rise to preference externalities because savings for one’s own descendants benefit present members of other dynasties. Since the external effect of present saving becomes less important over time, each dynasty has time inconsistent preferences. In a stationary Markov-perfect equilibrium, the saving rate is increasing in cross-dynastic intergenerational altruism and decreasing in the number of dynasties. In the limiting case, when the number of dynasties goes to infinity, the equilibrium saving rate equals the saving rate without cross-dynastic intergenerational altruism. The efficient saving rate with cross-dynastic intergenerational altruism is substantially higher than the equilibrium saving rate. Even limited cross-dynastic intergenerational altruism therefore plays a normative role. The analysis offers new insights on the “isolation paradox”, “hyperbolic” discounting and interdependent utility.