Intergenerational Intermediation and Altruistic Preferences

Abstract

The paper analyzes the intermediation role of government under the assumption that it has an advantage over the private sector in collecting uncollateralized loan payments. It isshown that a government loan program may improve the welfare of all generations (including the current old generation) if agents care about future generations in the time inconsistent manner originally proposed by Phelps and Pollak (1968). Numerical examples suggest that the welfare gains from intervention may be quite large and depends on the degree of altruism as defined by Phelps and Pollak. The welfare gains are large when agents are relatively “egoistic†because in this case the time inconsistency problem is more severe and there is more room for intervention.