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Bohn, Henning
Year of Publication: 
Series/Report no.: 
CESifo Working Paper 4270
Democracies around the world are making promises to the old at the expense of future generations. I interpret this as reflecting low altruism a discount rate on children's utility greater than the world interest rate and I examine the implications in a small open economy with overlapping generations. A focus is on the public sector: The model includes public capital in production and public education as determinant of human capital. I examine to what extent both are crowded out by spending on debt and retiree entitlements. In the model, altruism towards children determines bequests, government debt, and the time-path of consumption. Altruism towards parents influences incentives to default. If altruism is low, voters demand fiscal policies that extract substantial resources from future generations. Public debt rises until debt service requires maximum taxes forever, and an era of austerity ensues: investment in human capital declines to a lower bound, and reduced human capital discourages investment in private and public capital. The threat of default enters as a constraint that may protect future generations.
government debt
overlapping generations
Document Type: 
Working Paper

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