Leaders' Preferences for Fairness and Risk-Sharing Across Generations
University of Washington - Department of Finance and Business Economics
Christopher M. Hrdlicka
University of Washington - Michael G. Foster School of Business
August 14, 2015
We propose a new and tractable model of fairness preferences to understand how leaders' often stated goal of intergenerational fairness influences their actions. We parameterize two distinct dimensions of fairness preferences, deterministic and stochastic fairness, to capture the heterogeneity in the importance of fairness to leaders. We apply these preferences to three public policy settings: endowed funds, public pension plans, and the depletion of natural resources. We find that observed behavior is consistent with a strong preference for deterministic fairness while the preference for stochastic fairness differs across settings. The preference for fairness alters behavior more for decisions affecting many generations, helping us understand the observed use of high short-run but low long-run discount rates in cost-benefit analysis by government leaders. Furthermore, these preferences can explain why long-run discount rates used in public policy choices, e.g., global warming mitigation, are lower than market-implied discount rates.
Number of Pages in PDF File: 59
Keywords: Fairness, intergenerational equity, risk-sharing, portfolio choice, endowments, public pension plans, global warming
JEL Classification: E61, D63, D78, H55, H43, Q32, Q56, G11
Date posted: June 2, 2012 ; Last revised: September 3, 2015
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