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Social Credibility, Social Patience and Long Run Inequality

45 Pages Posted: 12 Oct 2005  

Christopher M. Sleet

Carnegie Mellon University - David A. Tepper School of Business

Sevin Yeltekin

Carnegie Mellon University - David A. Tepper School of Business

Date Written: July 2005

Abstract

This paper considers optimal social insurance in a dynamic moral hazard economy. The existing literature has focussed on environments in which a planner and a population of agents share the same discount factor. A key finding is that agents are then almost surely immiserated; their welfare is driven to its lowest bound. Such immiseration requires a social commitment to treat (almost) everyone arbitrarily badly in the long run. We argue that this is implausible. We establish an equivalence between optimal allocations in two environments: those in which the planner lacks commitment and is constrained to choose socially credible policies and those in which the planner's discount factor exceeds the agents'. We show that immiseration result no longer holds in the second environment. Optimal allocations in this environment are characterised by social mobility and a degree of inequality that it is falling in the planner's discount factor. The credibility constrained economy inherits the no immiseration and social mobility properties.

Keywords: Social insurance, credibility, immiseration

JEL Classification: C73, D82, E62

Suggested Citation

Sleet, Christopher M. and Yeltekin, Sevin, Social Credibility, Social Patience and Long Run Inequality (July 2005). Available at SSRN: https://ssrn.com/abstract=815885 or http://dx.doi.org/10.2139/ssrn.815885

Christopher Sleet (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://business.tepper.cmu.edu/display_faculty.aspx?id=244

Sevin Yeltekin

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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