Leaders' Preferences for Fairness and Risk-Sharing Across Generations

Abstract

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 shed light on 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