Trading off generations: Equity, discounting, and climate change

The prevailing literature discusses intergenerational trade-offs in climate change predominantly in terms of the Ramsey equation relying on the infinitely lived agent model. We discuss these trade-offs in a continuous time OLG framework and relate our results to the infinitely lived agent setting. We identify three shortcomings of the latter: first, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies.

► Set up continuous time OLG model for agents with a finite deterministic life-span. ► Relate equilibria and underlying parameters to infinitely lived agent (ILA) economy. ► Reveal shortcomings of ILA model for descriptive and normative parameter elicitation. ► Discuss intergenerational trade-offs over time and between generations alive. ► Apply findings to the recent debate on climate change.