NBER WORKING PAPER SERIES

FORWARD AND BACKWARD INTERGENERATIONAL GOODS:A THEORY OF INTERGENERATIONAL EXCHANGE

Antonio Rangel

Working Paper 7518http://www.nber.org/papers/w7518

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138February 2000

I am grateful to Alberto Alesina, Marty Feldstein and Eric Maskin for their suggestions and support duringthe process of writing about intergenerational issues. I also want to thank James Alt, Gadi Barlevy, DougBernheim, Francesco Caselli, Andrew Cohen, Alejandro Cunat, David Cutler, Sven Feldman, DrewFudenberg, Jerry Green, Oliver Hart, James Hines, Mireille Jacobson, Matthew Jackson, Chad Jones,Jonathan Katz, David Laibson, John Ledyard, Jeff Liebman, Andreu Mos-Colell, Jill Morningstar, StephenMorris, Casey Mulligan, Dina Older-Aguilar, Torsten Persson, James Poterba, Richard McKelvey, ToddSandler, Ken Shepsle, Andrei Schleifer, Joaquim Silvestre, Tomas Sjostrom, Steve Tadelis, JaumeVentura, Richard Zeckhauser and seminar participants at Harvard, Caltech, Davis, Stanford,Northwestern, Illinois-Urbana, Iowa, and Rochester for their helpful comments. The views expressedherein are those of the author and not necessarily those of the National Bureau of Economic Research.

© 2000 by Antonio Rangel. All rights reserved. Short sections of text, not to exceed two paragraphs, maybe quoted without explicit permission provided that full credit, including © notice, is given to the source.

Forward and Backward Intergenerational Goods: A Theory of Intergenerational ExchangeAntonio RangelNBER Working Paper No. 7518February 2000JEL No. H0, H3, H4, I2, D1, D7, C7, E6

ABSTRACT

This paper develops a theory of intergenerational exchange for generations that are either selfish

or have non-dynastic altruism. The main building blocks of the theory are forward and backward

intergenerational goods (FIGs and BIGs) and the relationship between them. A FIG is a transfer from

present to future generations, like parental investments in education and the preservation of the environment.

A BIG is a transfer from future to present generations, like pay-as -you-go social security or taking care

of elderly parents. We show that there is a fundamental difference between BIGs and FIGs. BIGs

generating a positive surplus are self-sustainable, but FIGs never are. However, even with selfish

generations, optimal investment in future generations can take place if the equilibrium social norm links BIGs

and FIGs. The tools developed here can be used to understand a wide class of intergenerational problems,

from the political economy of environmental treaties to the economics of seniority institutions. Two

applications are developed in the paper: (1) the political economy of intergenerational public expenditures,

and (2) investment in children within the family.

Antonio RangelAssistant Professor of EconomicsStanford UniversityStanford, CA 94305and NBERrangel@leland.stanford.edu