59 Pages Posted: 2 Jun 2012 Last revised: 3 Sep 2015
Date Written: 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.
Keywords: Fairness, intergenerational equity, risk-sharing, portfolio choice, endowments, public pension plans, global warming
JEL Classification: E61, D63, D78, H55, H43, Q32, Q56, G11
Suggested Citation: Suggested Citation
Gilbert, Thomas and Hrdlicka, Christopher M., Leaders' Preferences for Fairness and Risk-Sharing Across Generations (August 14, 2015). Available at SSRN: https://ssrn.com/abstract=2072323 or http://dx.doi.org/10.2139/ssrn.2072323